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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K/A

Amendment No. 1



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(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2005



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from
 to

Commission file number 000-13059



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CERADYNE, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0055414                          
|(State or other jurisdiction of Incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3169 Red Hill Avenue, Costa Mesa, California                   |  | 92626                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(714) 549-0421

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share



---

Indicate by check mark whether the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act of
1933.    YES  x    NO ̈

Indicate by check mark whether the registrant is not required to file reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934.    YES ̈NO  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90
days.    YES  x    NO ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).    Yes ̈No  x

The aggregate market value of registrants common stock held by non-affiliates as of June 30, 2005 (the last business day of
registrants most recently completed second fiscal quarter) was approximately $551 million.

As of March 15, 2006, there were
26,810,659 shares of registrants Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:Portions of registrants definitive
proxy statement for its annual meeting of stockholders to be held on June 6, 2006 are incorporated by reference into Part III of this Form 10-K.



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##### Table of Contents

EXPLANATORY NOTE

This Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2005 reflects a correction of clerical errors in the consolidated financial statements included in Item 8, Financial Statements
and Supplementary Data, and in the list of exhibits included in Item 15(b), as follows:

(a) The total comprehensive income for the year
ended December 31, 2005, as set forth in the Consolidated Statements of Stockholders Equity at page F-4 of the Form 10-K as filed on March 16, 2006, was incorrectly stated as $(20,551) when the correct total amount should be $26,227. This
error had no other impact on the consolidated financial statements in Item 8 and had no impact on Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.

(b) Reference to Exhibit 10.10 was inadvertently omitted from the list of exhibits contained in Item 15(b) of the Form 10-K as filed on March 16, 2006.
The Exhibit Index included with the Form 10-K as filed on March 16, 2006, however, did include Exhibit 10.10.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and
Supplementary Data commence at page F-1 of this report and an index thereto is included in Part IV, Item 15 of this report.



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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) List of documents filed as part of this report:

Financial Statements:



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Registered Public Accounting Firm                                              |  | F-1 
|Consolidated Balance Sheets at December 31, 2005 and 2004                                            |  | F-2 
|Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003               |  | F-3 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2005, 2004 and 2003 |  | F-4 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003           |  | F-5 
|Notes to Consolidated Financial Statements                                                           |  | F-6 

(b) List of Exhibits



|              |  |                                                                                                                                                                                                                                                                                              
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                  
|2.1           |  | Sale and Purchase Agreement dated June 30, 2004, between registrant and Wacker-Chemie GmbH. Incorporated herein by reference to Exhibit 2.1 of Registrants Form 8-K Current Report dated
August 23, 2004, filed with the Commission on August 26, 2004.                                     
|              | 
|3.1           |  | Restated Certificate of Incorporation of Ceradyne, Inc., as filed with the Secretary of State of Delaware on May 25, 1987. Incorporated herein by reference to Exhibit 3.1 to the
Registrants Form 10-Q Report for the quarter ended June 30, 2004.                                         
|              | 
|3.2           |  | Certificate of Amendment of Restated Certificate of Incorporation of Ceradyne, Inc., as filed with the Secretary of State of Delaware on May 27, 2004. Incorporated herein by reference to
Exhibit 3.2 to the Registrants Form 10-Q Report for the quarter ended June 30, 2004.             
|              | 
|3.3           |  | Bylaws of Registrant. Incorporated herein by reference to Exhibit 3.2 to the Registrants Form 10-Q Report for the period ended June 30, 1996.                                                                                                                                               
|              | 
|3.4           |  | Amendment to Bylaws of Registrant, adopted April 29, 1996. Incorporated herein by reference to Exhibit 3.3 to the Registrants Form 10-Q Report for the period ended June 30,
1996.                                                                                                          
|              | 
|4.1           |  | Indenture dated December 19, 2005, between Ceradyne, Inc. and Union Bank of California, N.A., as Trustee. Incorporated herein by reference to Exhibit 4.1 of Registrants Form 8-K Current
Report dated December 13, 2005, filed with the Commission on December 19, 2005.                   
|              | 
|4.2           |  | First Supplemental Indenture dated December 19, 2005, between Ceradyne, Inc. and Union Bank of California, N.A., as Trustee. Incorporated herein by reference to Exhibit 4.2 of
Registrants Form 8-K Current Report dated December 13, 2005, filed with the Commission on December 19, 2005.
|              | 
|4.3           |  | Form of 2.875% Senior Subordinated Convertible Note due 2035. Incorporated herein by reference to Exhibit 4.3 of Registrants Form 8-K Current Report dated December 13, 2005, filed with
the Commission on December 19, 2005.                                                               
|              | 
|10.1          |  | Lease between Trico Rents and the Registrant dated March 23, 1984, covering premises located at 235 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.14
to the Registrants Registration Statement on Form S-1 (File No. 2-90821).                   
|              | 
|10.2          |  | Lease covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California dated October 28, 1985. Incorporated herein by reference to Exhibit 10.30 to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 1985.                                      
|              | 
|10.3          |  | Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.45 to the Registrants Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.                                          
|              | 
|10.4          |  | Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.46 to the Registrants Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.                                          



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5   |  | Short-form Memorandum of Lease Assignment dated December 15, 1986, and Lease dated June 23, 1980, covering premises located at 3449 Church Street, Scottdale, Georgia. Incorporated
herein by reference to Exhibit 10.47 to the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1986.                                                                                                               
|       | 
|10.6   |  | Joint Development Agreement dated March 28, 1986 between Unitek Corporation and the Registrant, and First and Second Amendments thereto. Incorporated herein by reference to Exhibit 10.52 to
the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1986.                                                                                                                                             
|       | 
|10.7*  |  | Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.31 to the Registrants Annual Report on Form 10-K for the fiscal year ended December 31,
1994.                                                                                                                                                                                                                                            
|       | 
|10.8*  |  | Amendment No. 1 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 4.2 to Registrants Registration Statement on Form S-8 (File No.
33-61675).                                                                                                                                                                                                                                           
|       | 
|10.9*  |  | Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated herein by reference to Exhibit 4.1 to Registrants Registration Statement on Form S-8 (File No. 33-61677).                                                                                                                                                                                                                                                          
|       | 
|10.10  |  | Amendment No. 2, dated June 5, 1995, to Lease between Trico Rents and the Registrant covering premises located at 235 Paularino Avenue, Costa Mesa, California. Incorporated herein by
reference to Exhibit 10.32 to the Registrants Registration Statement on Form S-1 (File No. 33-62345).                                                                                                                                      
|       | 
|10.11  |  | Amendment No. 2, dated June 5, 1995, to Lease covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.33 to the
Registrants Registration Statement on Form S-1 (File No. 33-62345).                                                                                                                                                                           
|       | 
|10.12  |  | Amendment No. 2, dated June 5, 1995, to Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.34
to the Registrants Registration Statement on Form S-1 (File No. 33-62345).                                                                                                                                                        
|       | 
|10.13  |  | Amendment No. 2, dated June 5, 1995, to Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.35
to the Registrants Registration Statement on Form S-1 (File No. 33-62345).                                                                                                                                                        
|       | 
|10.14* |  | Amendment No. 2 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.36 to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.                                                                                                                                                                                                                     
|       | 
|10.15* |  | Amendment No. 3 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 4.4 to Registrants Registration Statement on Form S-8 (File No.
333-31679).                                                                                                                                                                                                                                          
|       | 
|10.16* |  | Amendment No. 4 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.29 to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.                                                                                                                                                                                                                     
|       | 
|10.17* |  | Amendment No. 5 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.29 to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.                                                                                                                                                                                                                     
|       | 
|10.18* |  | Amendment No. 6 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporate herein by reference to Exhibit 4.7 to the Registrants Registration Statement on Form S-8 (File No.
333-64094).                                                                                                                                                                                                                                       
|       | 
|10.19* |  | Amendment No. 1 to the Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated herein by reference to Exhibit 4.2 to the Registrants Registration Statement on Form S-8 (File No.
333-64078).                                                                                                                                                                                                                              
|       | 
|10.20  |  | Agreement to Extend Lease and Increase Rental Between Ida S. Borochoff and Lance Borochoff as Co-Trustees of the Charles Z. Borochoff Marital Trust created under the Will of Charles Z.
Borochoff, as Landland and CERADYNE, INC., as Successor to Thermo Materials Corporation, as Tenant. Incorporated herein by reference to Exhibit 10.33 to the Registrants Annual Report on Form 10-K for the year ended December 31,
2002.
|       | 
|10.21* |  | Amendment No. 7 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by referenced to Exhibit 10.34 to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2002.                                                                                                                                                                                                                           
|       | 
|10.22* |  | Ceradyne, Inc. 2003 Stock Incentive Plan, as Amended and Restated as of April 11, 2005. Incorporated herein by reference to Exhibit 10.1 to the Registrants Form 8-K Current Report dated
May 23, 2005, filed with the Commission on May 26, 2005.                                                                                                                                                                                
|       | 
|10.23* |  | Form of Stock Option Agreement for use under the 2003 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.2 to the Registrants Form 8-K Current Report dated May 23,
2005, filed with the Commission on May 26, 2005.                                                                                                                                                                                            



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.24* |  | Form of Restricted Stock Unit Award Agreement for use under the 2003 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.3 to the Registrants Form 8-K Current Report
dated May 23, 2005, filed with the Commission on May 26, 2005.                                                                                                                                                                                                                                                                                               
|       | 
|10.25  |  | Lease agreement between California State Teachers Retirement System, as Landlord and CERADYNE, INC., as tenant. Incorporated herein by reference to Exhibit 10.23 to the
Registrants Annual Report on Form 10-K for the year ended December 31, 2003.                                                                                                                                                                                                                                                                                              
|       | 
|10.26  |  | Credit Agreement dated August 18, 2004, between registrant, Wachovia Bank and the other lenders named therein. Incorporated herein by reference to Exhibit 10.1 of Registrants Form 8-K
Current Report dated August 23, 2004, filed with the Commission on August 26, 2004.                                                                                                                                                                                                                                                                         
|       | 
|10.27  |  | Amendment No. 1 dated December 22, 2004, to the Credit Agreement dated August 18, 2004, between registrant, Wachovia Bank and the other lenders named therein. Incorporated herein by reference
to Exhibit 10.25 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2004.                                                                                                                                                                                                                                                
|       | 
|10.28  |  | Amendment No. 2 to Credit Agreement, dated December 13, 2005, between Ceradyne, Inc., Ceradyne ESK, LLC and ESK Ceramics GmbH & Co. KG (collectively, the Borrowers), and the
banks, financial institutions and other lenders party thereto (collectively, the Lenders), and Wachovia Bank, National Association, as collateral agent and administrative agent for the Lenders. Incorporated herein by reference to Exhibit
10.1 of Registrants Form 8-K Current Report dated December 13, 2005, filed with the Commission on December 19, 2005.
|       | 
|10.29* |  | Cash Fees Payable to Non-Employee Directors for Service on the Board and its Committees. Incorporated herein by reference to Exhibit 10.3 of Registrants Form 8-K Current Report dated
February 28, 2005, filed with the Commission on March 4, 2005.                                                                                                                                                                                                                                                                                               
|       | 
|10.30* |  | Base Salaries Payable to Executive Officers during 2006. Incorporated herein by reference to Exhibit 10.1 of Registrants Form 8-K Current Report dated March 6, 2006, filed with the
Commission on March 9, 2006.                                                                                                                                                                                                                                                                                                                                   
|       | 
|10.31* |  | Cash Bonus Plan for Executive Officers for 2006. Incorporated herein by reference to Exhibit 10.2 of Registrants Form 8-K Current Report dated March 6, 2006, filed with the Commission
on March 9, 2006.                                                                                                                                                                                                                                                                                                                                           
|       | 
|10.32  |  | Lease dated March 11, 1997 covering premises located at 3159-A Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       | 
|10.33  |  | Extension No. 2, dated February 2, 2005, to Lease dated March 11, 1997 covering premises located at 3159-A Red Hill Avenue , Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                 
|       | 
|10.34  |  | Lease dated January 24, 2001 covering premises located at 3161 Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       | 
|10.35  |  | Extension No. 1, dated February 2, 2005, to Lease dated January 24, 2001 covering premises located at 3161 Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                  
|       | 
|10.36  |  | Extension No. 4, dated February 2, 2005, to Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 
|10.37  |  | Extension No. 4, dated February 2, 2005, to Lease dated October 28, 1985 covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                
|       | 
|10.38  |  | Lease dated October 28, 1985 covering premises located at 3169-B Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 
|10.39  |  | Extension No. 4, dated February 2, 2005, to Lease dated October 28, 1985 covering premises located at 3169-B Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                
|       | 
|10.40  |  | Extension No. 4, dated February 4, 2005, to Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 
|10.41  |  | Lease dated February 4, 2005, covering premises located at 201 Paularino Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 
|10.42  |  | Lease dated February 4, 2005, covering premises located at 3159-B Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | 
|10.43  |  | Extension No. 1, dated February 7, 2005, to Lease dated March 23, 2004 covering premises located at 235 Paularino Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 
|10.44  |  | Lease dated August 6, 2001covering premises located at 3165-A Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 
|10.45  |  | Extension No. 1, dated March 9, 2005, to Lease dated August 6, 2001 covering premises located at 3165-A Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                     



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|      |  |                                                                                                                                                                           
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.46 |  | Lease dated January 5, 2005 covering premises located at 205 Paularino Avenue, Costa Mesa, California.                                                                    
|      | 
|10.47 |  | Extension No. 1, dated July 14, 2005, to Lease dated January 5, 2005, covering premises located at 205 Paularino Avenue, Costa Mesa, California.                          
|      | 
|12.1  |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                        
|      | 
|14.1  |  | Code of Business Conduct and Ethics. Incorporated herein by reference to Exhibit 14.1 to the Registrants Annual Report on Form 10-K for the year ended December 31,
2004.
|      | 
|21.1  |  | Subsidiaries of the Registrant. Incorporated herein by reference to Exhibit 21.1 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2004.     
|      | 
|23.1  |  | Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.                                                                                     
|      | 
|31.1  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       
|      | 
|31.2  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       
|      | 
|32.1  |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       
|      | 
|32.2  |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       

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|* | Each of these exhibits constitutes a management contract, compensatory plan, or arrangement.
|- | --------------------------------------------------------------------------------------------



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CERADYNE, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Directors and Stockholders of Ceradyne, Inc.:

We have completed
integrated audits of Ceradyne, Inc.s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 15(a) present fairly, in all material respects, the financial position of Ceradyne, Inc. and its subsidiaries at December 31, 2005 and December 31, 2004, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, managements assessment, included in Managements Report on Internal Control Over Financial Reporting appearing under Item 9A, that
the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting
based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

/s/ PricewaterhouseCoopers LLP

Orange County, California

March 16, 2006



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##### Table of Contents

CERADYNE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share data)



|                                                                                                                                                         |  |              |         |   |      |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | -------
|                                                                                                                                                         |  | December 31,
|                                                                                                                                                         |  | 2005         |         |   | 2004
|ASSETS                                                                                                                                                   |  |              |         |   |      |   |        
|Current assets:                                                                                                                                          |  |              |         |   |      |   |        
|Cash and cash equivalents                                                                                                                                |  | $            | 91,542  |   |      | $ | 4,521  
|Short term investments                                                                                                                                   |  |              | 7,839   |   |      |   | 10,041 
|Accounts receivable, net of allowances for doubtful accounts of $545 and $456 in 2005 and 2004, respectively                                             |  |              | 57,174  |   |      |   | 48,649 
|Other receivables                                                                                                                                        |  |              | 3,309   |   |      |   | 3,175  
|Inventories                                                                                                                                              |  |              | 66,318  |   |      |   | 47,673 
|Production tooling                                                                                                                                       |  |              | 14,102  |   |      |   | 7,868  
|Prepaid expenses and other                                                                                                                               |  |              | 8,592   |   |      |   | 8,510  
|Deferred tax asset                                                                                                                                       |  |              | 6,341   |   |      |   | 4,210  
|                                                                                                                                                         |  |              |         |   |      |   |        
|Total current assets                                                                                                                                     |  |              | 255,217 |   |      |   | 134,647
|Property, plant and equipment, net                                                                                                                       |  |              | 153,259 |   |      |   | 162,278
|Intangible assets, net                                                                                                                                   |  |              | 6,034   |   |      |   | 7,235  
|Goodwill                                                                                                                                                 |  |              | 9,265   |   |      |   | 6,079  
|Other assets                                                                                                                                             |  |              | 6,418   |   |      |   | 6,115  
|                                                                                                                                                         |  |              |         |   |      |   |        
|Total assets                                                                                                                                             |  | $            | 430,193 |   |      | $ | 316,354
|                                                                                                                                                         |  |              |         |   |      |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                     |  |              |         |   |      |   |        
|Current liabilities:                                                                                                                                     |  |              |         |   |      |   |        
|Bank line of credit                                                                                                                                      |  | $            |        |   |      | $ | 9,708  
|Current maturities of long-term debt                                                                                                                     |  |              |        |   |      |   | 1,100  
|Accounts payable                                                                                                                                         |  |              | 23,311  |   |      |   | 32,830 
|Accrued expenses                                                                                                                                         |  |              | 11,878  |   |      |   | 7,981  
|Income taxes payable                                                                                                                                     |  |              | 7,719   |   |      |   | 4,639  
|                                                                                                                                                         |  |              |         |   |      |   |        
|Total current liabilities                                                                                                                                |  |              | 42,908  |   |      |   | 56,258 
|Long-term debt, less current maturities                                                                                                                  |  |              | 121,000 |   |      |   | 108,625
|Employee benefits                                                                                                                                        |  |              | 11,229  |   |      |   | 10,735 
|Deferred tax liability                                                                                                                                   |  |              | 4,536   |   |      |   | 5,695  
|                                                                                                                                                         |  |              |         |   |      |   |        
|Total liabilities                                                                                                                                        |  |              | 179,673 |   |      |   | 181,313
|                                                                                                                                                         |  |              |         |   |      |   |        
|Commitments and contingencies (Note 8)                                                                                                                   |  |              |         |   |      |   |        
|                                                                                                                                                         |  |             
|Stockholders equity:                                                                                                                                    |  |              |         |   |      |   |        
|Common Stock, $.01 par value: 40,000,000 authorized; 26,795,774 and 24,479,420 shares issued and outstanding at December 31, 2005 and
2004, respectively |  |              | 292     |   |      |   | 244    
|Additional paid in capital                                                                                                                               |  |              | 170,430 |   |      |   | 79,720 
|Retained earnings                                                                                                                                        |  |              | 88,632  |   |      |   | 41,854 
|Deferred compensation                                                                                                                                    |  |              | (1,506  | ) |      |   |       
|Accumulated other comprehensive (loss) income                                                                                                            |  |              | (7,328  | ) |      |   | 13,223 
|                                                                                                                                                         |  |              |         |   |      |   |        
|Total stockholders equity                                                                                                                               |  |              | 250,520 |   |      |   | 135,041
|                                                                                                                                                         |  |              |         |   |      |   |        
|Total liabilities and stockholders equity                                                                                                               |  | $            | 430,193 |   |      | $ | 316,354
|                                                                                                                                                         |  |              |         |   |      |   |        

The accompanying notes are an integral part of these consolidated statements.



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##### Table of Contents

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for per share data)



|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                   |  | Years ended December 31, |        
|                                                   |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|Net sales                                          |  | $                        | 368,253 |   |      | $ | 215,612 |      |  | $ | 101,473 |  
|Cost of product sales                              |  |                          | 237,115 |   |      |   | 146,518 |      |  |   | 72,124  |  
|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Gross profit                                       |  |                          | 131,138 |   |      |   | 69,094  |      |  |   | 29,349  |  
|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Operating expenses:                                |  |                          |         |   |      |   |         |      |  |   |         |  
|Selling                                            |  |                          | 20,694  |   |      |   | 8,266   |      |  |   | 2,440   |  
|General and administrative                         |  |                          | 21,014  |   |      |   | 14,131  |      |  |   | 7,799   |  
|Research and development                           |  |                          | 7,802   |   |      |   | 3,341   |      |  |   | 2,111   |  
|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|                                                   |  |                          | 49,510  |   |      |   | 25,738  |      |  |   | 12,350  |  
|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Operating income                                   |  |                          | 81,628  |   |      |   | 43,356  |      |  |   | 16,999  |  
|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Other income (expense)                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Royalty income                                     |  |                          | 145     |   |      |   | 146     |      |  |   | 151     |  
|Interest income                                    |  |                          | 434     |   |      |   | 476     |      |  |   | 136     |  
|Miscellaneous, net                                 |  |                          | 275     |   |      |   | 1,602   |      |  |   | 34      |  
|Interest expense                                   |  |                          | (9,252  | ) |      |   | (1,661  | )    |  |   | (32     | )
|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|                                                   |  |                          | (8,398  | ) |      |   | 563     |      |  |   | 289     |  
|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Income before provision for income taxes           |  |                          | 73,230  |   |      |   | 43,919  |      |  |   | 17,288  |  
|Provision for income taxes                         |  |                          | 26,452  |   |      |   | 16,346  |      |  |   | 6,051   |  
|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                         |  | $                        | 46,778  |   |      | $ | 27,573  |      |  | $ | 11,237  |  
|                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income per common share:                       |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic                                              |  | $                        | 1.90    |   |      | $ | 1.14    |      |  | $ | 0.52    |  
|Diluted                                            |  | $                        | 1.86    |   |      | $ | 1.12    |      |  | $ | 0.51    |  
|Shares used in computing per common share amounts: |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic                                              |  |                          | 24,635  |   |      |   | 24,170  |      |  |   | 21,442  |  
|Diluted                                            |  |                          | 25,107  |   |      |   | 24,598  |      |  |   | 21,900  |  

The accompanying notes are an integral part of these consolidated statements.



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##### Table of Contents

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands, except for share data)



|                                                       |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|------------------------------------------------------ |  | ---------------- | - |  | ---------------- | ------- | -------------------- |  | - | ------------------------------------------ |  | - | ------------------------ | - |  | - | ------- | - |  | - | ------- | -
|                                                       |  | Common Stock     |   |  | RetainedEarnings |         | DeferredCompensation |  |   | AccumulatedOtherComprehensiveIncome (Loss) |  |   | TotalStockholdersEquity |  
|                                                       |  | Number of Shares |   |  | Amount           |         |                      |  |   |                                           
|Balance, December 31, 2002                             |  | 19,172,326       |   |  | $                | 40,044  |                      |  | $ | 3,044                                      |  |   |                         |   |  |   |        |   |  | $ | 43,088  |  
|Offering of common stock                               |  | 3,881,250        |   |  |                  | 27,932  |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 27,932  |  
|Issuance of common stock                               |  | 135,779          |   |  |                  | 421     |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 421     |  
|Exercise of stock options                              |  | 707,310          |   |  |                  | 1,434   |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 1,434   |  
|Tax benefit from exercise stock options                |  |                 |   |  |                  | 2,665   |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 2,665   |  
|Net income                                             |  |                 |   |  |                  |        |                      |  |   | 11,237                                     |  |   |                         |   |  |   |        |   |  |   | 11,237  |  
|                                                       |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2003                             |  | 23,896,665       |   |  |                  | 72,496  |                      |  |   | 14,281                                     |  |   |                         |   |  |   |        |   |  |   | 86,777  |  
|Comprehensive income:                                  |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|Net income                                             |  |                 |   |  |                  |        |                      |  |   | 27,573                                     |  |   |                         |   |  |   |        |   |  |   | 27,573  |  
|Net unrealized loss on available-for-sale securities   |  |                 |   |  |                  |        |                      |  |   |                                           |  |   |                         |   |  |   | (47     | ) |  |   | (47     | )
|Minimum pension liability, net                         |  |                 |   |  |                  |        |                      |  |   |                                           |  |   |                         |   |  |   | (325    | ) |  |   | (325    | )
|Cumulative translation adjustment                      |  |                 |   |  |                  |        |                      |  |   |                                           |  |   |                         |   |  |   | 13,595  |   |  |   | 13,595  |  
|                                                       |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|Total comprehensive income                             |  |                 |   |  |                  |        |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 40,796  |  
|                                                       |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|Issuance of common stock                               |  | 111,625          |   |  |                  | 1,258   |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 1,258   |  
|Issuance of common stock for acquisitions              |  | 107,095          |   |  |                  | 2,140   |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 2,140   |  
|Exercise of stock options                              |  | 364,122          |   |  |                  | 965     |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 965     |  
|Tax benefit from exercise of stock options             |  |                 |   |  |                  | 3,112   |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 3,112   |  
|Purchase of fractional shares from stock split         |  | (87              | ) |  |                  | (7      | )                    |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | (7      | )
|                                                       |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2004                             |  | 24,479,420       |   |  |                  | 79,964  |                      |  |   | 41,854                                     |  |   |                         |   |  |   | 13,223  |   |  |   | 135,041 |  
|Comprehensive income:                                  |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|Net income                                             |  |                 |   |  |                  |        |                      |  |   | 46,778                                     |  |   |                         |   |  |   |        |   |  |   | 46,778  |  
|Net unrealized loss on available-for-sale securities   |  |                 |   |  |                  |        |                      |  |   |                                           |  |   |                         |   |  |   | (96     | ) |  |   | (96     | )
|Minimum pension liability, net                         |  |                 |   |  |                  |        |                      |  |   |                                           |  |   |                         |   |  |   | (1,234  | ) |  |   | (1,234  | )
|Cumulative translation adjustment                      |  |                 |   |  |                  |        |                      |  |   |                                           |  |   |                         |   |  |   | (19,221 | ) |  |   | (19,221 | )
|                                                       |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|Total comprehensive income                             |  |                 |   |  |                  |        |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 26,227  |  
|                                                       |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|Offering of common stock, net of issuance cost of $534 |  | 2,070,000        |   |  |                  | 84,680  |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   | 84,680  |  
|Issuance of common stock                               |  | 70,646           |   |  |                  | 1,713   |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 1,713   |  
|Issuance of restricted stock                           |  |                 |   |  |                  | 1,728   |                      |  |   |                                           |  |   | (1,728                   | ) |  |   |        |   |  |   |        |  
|Exercise of stock options                              |  | 175,708          |   |  |                  | 1,067   |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 1,067   |  
|Amortization of deferred compensation                  |  |                 |   |  |                  |         |                      |  |   |                                           |  |   | 222                      |   |  |   |        |   |  |   | 222     |  
|Tax benefit from exercise of stock options             |  |                 |   |  |                  | 1,570   |                      |  |   |                                           |  |   |                         |   |  |   |        |   |  |   | 1,570   |  
|                                                       |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2005                             |  | 26,795,774       |   |  | $                | 170,722 |                      |  | $ | 88,632                                     |  | $ | (1,506                   | ) |  | $ | (7,328  | ) |  | $ | 250,520 |  
|                                                       |  |                  |   |  |                  |         |                      |  |   |                                            |  |   |                          |   |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these consolidated statements.



F-4



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##### Table of Contents

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                  |  | Years ended December 31, |         
|                                                                                  |  | 2005                     |          |   | 2004 |   |          | 2003 | 
|Cash flows from operating activities:                                             |  |                          |          |   |      |   |          |      |  |   |         |  
|Net income                                                                        |  | $                        | 46,778   |   |      | $ | 27,573   |      |  | $ | 11,237  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |         |  
|Depreciation and amortization                                                     |  |                          | 15,203   |   |      |   | 7,554    |      |  |   | 3,328   |  
|Deferred income taxes                                                             |  |                          | (2,722   | ) |      |   | (216     | )    |  |   | 1,116   |  
|Stock compensation                                                                |  |                          | 222      |   |      |   |         |      |  |   |        |  
|Loss on equipment disposal                                                        |  |                          | 34       |   |      |   |         |      |  |   |        |  
|Changes in operating assets and liabilities, net of assets acquired:              |  |                          |          |   |      |   |          |      |  |   |         |  
|Accounts receivable, net                                                          |  |                          | (10,395  | ) |      |   | (14,373  | )    |  |   | (7,095  | )
|Other receivables                                                                 |  |                          | (233     | ) |      |   | 809      |      |  |   | (178    | )
|Inventories                                                                       |  |                          | (22,378  | ) |      |   | (3,412   | )    |  |   | (814    | )
|Production tooling                                                                |  |                          | (6,009   | ) |      |   | (3,529   | )    |  |   | (451    | )
|Prepaid expenses and other                                                        |  |                          | (431     | ) |      |   | (3,604   | )    |  |   | (1,128  | )
|Other assets                                                                      |  |                          | (792     | ) |      |   | 746      |      |  |   |        |  
|Accounts payable                                                                  |  |                          | (6,730   | ) |      |   | 8,847    |      |  |   | 5,490   |  
|Accrued expenses                                                                  |  |                          | 171      |   |      |   | 3,556    |      |  |   | 2,007   |  
|Income tax payable                                                                |  |                          | 2,728    |   |      |   | 4,428    |      |  |   |        |  
|Tax benefit from exercise of stock options                                        |  |                          | 1,570    |   |      |   | 3,112    |      |  |   | 2,665   |  
|Other liabilities                                                                 |  |                          | 4,102    |   |      |   | 1,311    |      |  |   |        |  
|Deferred revenue                                                                  |  |                          |         |   |      |   |         |      |  |   | (213    | )
|Warranty reserve                                                                  |  |                          |         |   |      |   |         |      |  |   | (596    | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Net cash provided by operating activities                                         |  |                          | 21,118   |   |      |   | 32,802   |      |  |   | 15,368  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Cash flows from investing activities:                                             |  |                          |          |   |      |   |          |      |  |   |         |  
|Purchases of property, plant and equipment                                        |  |                          | (20,223  | ) |      |   | (26,563  | )    |  |   | (12,293 | )
|Redemptions (purchases) of marketable securities                                  |  |                          | 2,202    |   |      |   | 9,088    |      |  |   | (19,202 | )
|Acquisition of businesses, net of cash acquired                                   |  |                          | (3,697   | ) |      |   | (141,280 | )    |  |   |        |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Net cash used in investing activities                                             |  |                          | (21,718  | ) |      |   | (158,755 | )    |  |   | (31,495 | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Cash flows from financing activities:                                             |  |                          |          |   |      |   |          |      |  |   |         |  
|Proceeds from common stock offering                                               |  |                          | 85,169   |   |      |   |         |      |  |   | 28,419  |  
|Costs of common stock offering                                                    |  |                          | (489     | ) |      |   |         |      |  |   | (487    | )
|Proceeds from issuance of common stock for stock plans                            |  |                          | 1,713    |   |      |   | 1,251    |      |  |   | 421     |  
|Proceeds from issuance of stock due to exercise of stock options                  |  |                          | 1,067    |   |      |   | 965      |      |  |   | 1,434   |  
|Payment of loan fees                                                              |  |                          |         |   |      |   | (3,227   | )    |  |   |        |  
|(Reduction in) borrowings on bank line of credit                                  |  |                          | (9,492   | ) |      |   | 9,708    |      |  |   | (2,390  | )
|Proceeds from long-term debt                                                      |  |                          | 121,000  |   |      |   | 110,000  |      |  |   | (158    | )
|(Payments) on long-term debt                                                      |  |                          | (109,725 | ) |      |   | (275     | )    |  |   |        |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Net cash provided by financing activities                                         |  |                          | 89,243   |   |      |   | 118,422  |      |  |   | 27,239  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Effect of exchange rates on cash and cash equivalents                             |  |                          | (1,622   | ) |      |   | 590      |      |  |   |        |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                  |  |                          | 87,021   |   |      |   | (6,941   | )    |  |   | 11,112  |  
|Cash and cash equivalents, beginning of period                                    |  |                          | 4,521    |   |      |   | 11,462   |      |  |   | 350     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                        | 91,542   |   |      | $ | 4,521    |      |  | $ | 11,462  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Supplemental disclosures of cash flow information:                                |  |                          |          |   |      |   |          |      |  |   |         |  
|Interest paid                                                                     |  | $                        | 6,683    |   |      | $ | 1,345    |      |  | $ | 40      |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Income taxes paid                                                                 |  | $                        | 35,834   |   |      | $ | 10,281   |      |  | $ | 2,398   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Supplemental schedule of non-cash financing activities:                           |  |                          |          |   |      |   |          |      |  |   |         |  
|Fulfillment of 401(k) obligations through the issuance of stock                   |  | $                        | 880      |   |      | $ | 556      |      |  | $ | 361     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  
|Issuance of common stock in connection with Quest acquisition                     |  |                          |         |   |      | $ | 2,140    |      |  |   |        |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |         |  

The accompanying notes are an integral part of these consolidated statements.



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Ceradyne, Inc.
(Ceradyne or the Company) develops, manufactures and markets advanced technical ceramic products and components for defense, industrial, automotive/diesel and commercial applications. The Companys competitive advantage
results from expertise in ceramic material science as well as a vertically integrated approach of designing much of its key equipment and controlling the manufacturing process from raw material powders to finished product. This allows the Company to
design and manufacture precision, high quality advanced technical ceramic products to meet demanding customer specifications. The Company markets its products to a broad range of industries in 50 countries. The Companys customers include the
U.S. government, prime government contractors and large industrial and commercial manufacturers.

In many high performance applications,
products made of advanced technical ceramics meet specifications that similar products made of metals, plastics or traditional ceramics cannot achieve. Advanced technical ceramics can withstand extremely high temperatures, combine hardness with
light weight, are highly resistant to corrosion and wear, and often have excellent electrical insulation capabilities, special electronic properties and low friction characteristics.

2. Summary of Significant Accounting Policies

a. Principles of Consolidation and Nature of
Operations

The consolidated financial statements include the financial statements of Ceradyne, Inc. (a Delaware Corporation), and
its subsidiaries. Ceradyne, Inc. and its subsidiaries are collectively referred to herein as the Company. All significant intercompany accounts and transactions have been eliminated.

b. Cash and Cash Equivalents

The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents.

c. Short Term Investments

The Companys short term investments consist of marketable
securities, primarily high-grade corporate and government securities. The Company classifies all of its investments as available-for-sale based on the Companys intent. As of December 31, 2005, the amount classified as available for sale
is $7.8 million, which is recorded at fair market value. The unrealized loss of $0.2 million has been recorded as a component of other comprehensive income.

d. Foreign Exchange Risk Management

The Company measures the financial statements of its
foreign subsidiaries using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the rates of
exchange prevailing during the year. Translation adjustments resulting from this process are included in stockholders equity. Gains and losses from foreign currency transactions are included in other income, miscellaneous.

e. Accounts Receivable, Net

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is determined by analyzing specific customer accounts and assessing the risk of uncollectibility based on
insolvency, disputes or other collection issues. In addition, the Company routinely analyzes the different aging categories and establishes allowances based on the length of time receivables are past due (based on contractual terms). A write-off
will occur if the settlement of the account receivable is less than the carrying amount or the Company ultimately determines the balance will not be collected. We do not have any off-balance-sheet credit exposure related to our customers.



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following are changes in the allowance for doubtful accounts for the years ended December 31, 2005, 2004 and 2003 (in thousands):



|                  |  |                            |     |           |   |     |                            |  |                      |     |  |   |    
|----------------- |  | -------------------------- | --- | --------- | - | --- | -------------------------- |  | -------------------- | --- |  | - | ---
|                  |  | Balance atBeginningof Year |     | Additions |   |     | Write-offsNet ofRecoveries |  | Balance atEnd ofYear
|December 31, 2005 |  | $                          | 456 |           | $ | 220 |                            |  | $                    | 131 |  | $ | 545
|December 31, 2004 |  | $                          | 112 |           | $ | 743 | (1)                        |  | $                    | 399 |  | $ | 456
|December 31, 2003 |  | $                          | 111 |           | $ | 230 |                            |  | $                    | 229 |  | $ | 112

---

|(1) | Additions in 2004 include $272 of allowance that was part of the ESK Ceramics acquisition.
|--- | ------------------------------------------------------------------------------------------

f. Inventories

Inventories
are valued at the lower of cost (first-in, first-out) or market. The write-down of inventory for obsolete items is based on managements estimate of the amount considered obsolete based on specific reviews of inventory items. In estimating the
write-down, management relies on its knowledge of the industry as well as its current inventory levels. The amounts the Company will ultimately realize could differ from amounts estimated by management. Inventory costs include the cost of material,
labor and manufacturing overhead. The following is a summary of inventories by component (in thousands):



|                |  |              |        |      |   |       
|--------------- |  | ------------ | ------ | ---- | - | ------
|                |  | December 31,
|                |  | 2005         |        | 2004
|Raw materials   |  | $            | 17,643 |      | $ | 11,697
|Work-in-process |  |              | 28,832 |      |   | 22,344
|Finished goods  |  |              | 19,843 |      |   | 13,632
|                |  |              |        |      |   |       
|                |  | $            | 66,318 |      | $ | 47,673
|                |  |              |        |      |   |       

g. Production Tooling

The Companys production tooling primarily consists of graphite tooling used in the manufacturing and furnace processes. This tooling is being
amortized over three to nine months.



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



h. Property, Plant and Equipment, Net

Property, plant and equipment is recorded at and consists of the following (in thousands):



|                                          |  |              |         |   |      |   |         |  
|----------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                          |  | December 31, |        
|                                          |  | 2005         |         |   | 2004 |  
|Land and Land Improvements                |  | $            | 9,085   |   |      | $ | 10,017  |  
|Building improvements                     |  |              | 49,607  |   |      |   | 54,483  |  
|Machinery and equipment                   |  |              | 116,284 |   |      |   | 112,130 |  
|Leasehold improvements                    |  |              | 13,605  |   |      |   | 11,134  |  
|Office equipment                          |  |              | 9,130   |   |      |   | 9,302   |  
|Construction in progress                  |  |              | 4,158   |   |      |   | 1,763   |  
|                                          |  |              |         |   |      |   |         |  
|                                          |  |              | 201,869 |   |      |   | 198,829 |  
|Accumulated depreciation and amortization |  |              | (48,610 | ) |      |   | (36,551 | )
|                                          |  |              |         |   |      |   |         |  
|                                          |  | $            | 153,259 |   |      | $ | 162,278 |  
|                                          |  |              |         |   |      |   |         |  

Depreciation and amortization of property, plant and equipment are provided using the
straight-line method over the following estimated useful lives:



|                        |  |                                         
|----------------------- |  | ----------------------------------------
|Buildings               |  | 30 years                                
|                        | 
|Machinery and equipment |  | 3 to 12 years                           
|                        | 
|Office equipment        |  | 5 years                                 
|                        | 
|Leasehold improvements  |  | Shorter of 10 years or the term of lease

Maintenance, repairs and minor renewals are charged to expense as incurred. Repairs and
maintenance expense approximated $8.8 million, $6.1 million, and $1.2 million in 2005, 2004, and 2003, respectively. Additions and improvements are capitalized. When assets are disposed of, the applicable costs and accumulated depreciation and
amortization are removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation expense was approximately $15.2 million, $7.6 million, and $3.3 million in 2005, 2004, and 2003, respectively.

i. Goodwill and Intangible Assets, Net

In accordance with SFAS 142, goodwill is not being amortized, but instead is subject to an annual assessment of impairment by applying a fair-value based test.

The Company performs an annual impairment test for goodwill in the fourth quarter of each year. Goodwill is allocated to four reporting units, which
represents the Companys operating segments. The Companys reporting units for purposes of applying the provisions of SFAS 142 are: Advanced Ceramics Operations, Semicon Associates, Thermo Materials and ESK Ceramics. SFAS 142
requires the Company to compare the fair value of the goodwill and indefinite lived intangible assets to the carrying amount on an annual basis to determine if there is potential impairment. If the fair value of goodwill and/or indefinite lived
intangible assets is less than the carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill and/or indefinite lived intangible assets is less than the carrying value. Fair value is determined based on
discounted cash flows, market multiples or appraised values as appropriate. At December 31, 2005, the Company did not believe any impairment of goodwill had occurred. Intangible assets with definite lives are amortized over their estimated
useful lives.

The roll forward of the goodwill balance by segment for the year ended December 31, 2005 is as follows (in thousands):



|                     |  |     |       |         |   |        |  |     |     |  |       |       |   |  |   |       |  
|-------------------- |  | --- | ----- | ------- | - | ------ |  | --- | --- |  | ----- | ----- | - |  | - | ----- | -
|                     |  | ACO |       | Semicon |   | Thermo |  | ESK |     |  | Total |      
|December 31, 2003    |  | $   | 629   |         | $ | 603    |  | $   | 279 |  | $     |      |   |  | $ | 1,511 |  
|Acquisition of Quest |  |     | 1,946 |         |   |       |  |     |    |  |       |      |   |  |   | 1,946 |  
|Acquisition of ESK   |  |     |      |         |   |       |  |     |    |  |       | 2,476 |   |  |   | 2,476 |  
|Translation          |  |     |      |         |   |       |  |     |    |  |       | 146   |   |  |   | 146   |  
|                     |  |     |       |         |   |        |  |     |     |  |       |       |   |  |   |       |  
|December 31, 2004    |  |     | 2,575 |         |   | 603    |  |     | 279 |  |       | 2,622 |   |  |   | 6,079 |  
|Acquisition of Quest |  |     | 33    |         |   |       |  |     |    |  |       |      |   |  |   | 33    |  
|Acquisition of ESK   |  |     |      |         |   |       |  |     |    |  |       | 3,588 |   |  |   | 3,588 |  
|Translation          |  |     |      |         |   |       |  |     |    |  |       | (435  | ) |  |   | (435  | )
|                     |  |     |       |         |   |        |  |     |     |  |       |       |   |  |   |       |  
|December 31, 2005    |  | $   | 2,608 |         | $ | 603    |  | $   | 279 |  | $     | 5,775 |   |  | $ | 9,265 |  



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The components of intangibles assets were as follows (in thousands):



|                              |  |                   |       |                         |   |           |  |   |      
|----------------------------- |  | ----------------- | ----- | ----------------------- | - | --------- |  | - | -----
|                              |  | December 31, 2005
|                              |  | GrossAmount       |       | AccumulatedAmortization |   | NetAmount
|Amortizing Intangibles Assets |  |                   |       |                         |   |           |  |   |      
|Backlog                       |  | $                 | 525   |                         | $ | 525       |  | $ |     
|Developed technology          |  |                   | 4,327 |                         |   | 347       |  |   | 3,980
|                              |  |                   |       |                         |   |           |  |   |      
|                              |  |                   | 4,852 |                         |   | 872       |  |   | 3,980
|                              |  |                   |       |                         |   |           |  |   |      
|Non-amortizing tradename      |  |                   | 2,054 |                         |   |          |  |   | 2,054
|                              |  |                   |       |                         |   |           |  |   |      
|Total                         |  | $                 | 6,906 |                         | $ | 872       |  | $ | 6,034
|                              |  |                   |       |                         |   |           |  |   |      

All of the intangible assets were acquired in 2004 (see Note 3). Amortization of definite-lived
intangible assets will be approximately $420 in each of the fiscal years 2006 through 2009. Amortization expense was approximately $212 and $660 in 2005 and 2004, respectively.

j. Sales Recognition

Sales
are recorded when all of the following have occurred: an agreement of sale exists, product delivery and acceptance has occurred or services have been rendered, and collection is reasonably assured. Management is required to make judgments about
whether or not collectibility is reasonably assured. The Company reduces revenue with reserves for estimated price concessions and sales returns. Allowances, which are recorded at the time revenue is recognized, in accordance with SFAS No. 48,
Revenue Recognition When Right of Return Exists, are based upon historical price concessions and sales returns. The Company does not record a warranty reserve on the sale of its products. For its largest product line, body armor, all of
which is sold to the U.S. Government, each lot of body armor is tested at an independent laboratory and the lot cannot be released for shipment to the U.S. Government until positive test results are received by both the U.S. Government and the
Company. For its non-body armor sales, the Company has experienced minimal claims from these types of sales. Additionally, due to the inherent nature, strength, durability and structural properties of ceramics, as well as a rigid quality control
program that includes, for some of our customers, having the customer accept quality test results prior to shipment, management does not believe a warranty reserve is necessary.

k. Net Income Per Share

Basic
net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding plus the effect of any dilutive stock options, common stock warrants and restricted stock units using the treasury stock method and the net share settlement method for the convertible debt. All
share data in these financial statements have been adjusted to give retroactive effect to a 3-for-2 split of the Companys common stock in the form of a 50% stock dividend distributed on April 7, 2004, and a second 3-for-2 split of the
Companys common stock in the form of a 50% stock dividend distributed on January 18, 2005.

The following is a summary of the
number of shares entering into the computation of net income per common and common equivalent share:



|                                              |  |              |  |            |  |           
|--------------------------------------------- |  | ------------ |  | ---------- |  | ----------
|                                              |  | December 31,
|                                              |  | 2005         |  | 2004       |  | 2003      
|Weighted average number of shares outstanding |  | 24,634,558   |  | 24,170,212 |  | 21,441,645
|Dilutive stock options and restricted stock   |  | 472,837      |  | 427,982    |  | 458,494   
|                                              |  |              |  |            |  |           
|Number of shares used in dilutive computation |  | 25,107,395   |  | 24,598,194 |  | 21,900,139
|                                              |  |              |  |            |  |           



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



l. Accounting for Long-Lived Assets

In accordance with SFAS No. 144, long-lived assets and intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit and adverse legal or regulatory developments. If it is determined that such indicators are present and the
review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair market value. Estimated fair market value is
determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. For the purposes of identifying and measuring impairment, long-lived assets are grouped with other assets and liabilities at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

m. Use of
Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those
estimates.

n. Engineering and Research

The costs associated with application engineering and internally-funded research are expensed as incurred and are included in cost of product sales or other operating expenses. Costs associated with research and
development were $7.8 million, $3.3 million and $2.1 million for years ended December 31, 2005, 2004 and 2003, respectively. In addition, the Company historically has and continues to engage in application engineering and internally funded
research to improve and reduce the cost of products and to develop new products. Costs associated with engineering were approximately $7.1 million, $3.8 million and $1.9 million in 2005, 2004 and 2003, respectively, and are included in cost of
product sales.

o. Fair Value of Financial Instruments

The carrying value of accounts receivable and trade payables approximates the fair value due to their short-term maturities. The carrying value of the
Companys unused line of credit is considered to approximate fair market value, as the interest rates of these instruments are based predominantly on variable reference rates. The fair value of long-term debt was $123.1 million and is based on
quoted market prices at December 31, 2005.

p. Income Taxes

The Company accounts for income taxes using the asset and liability approach. Under this approach, deferred taxes are determined based on the differences
between the financial statements and the tax bases using rates as enacted in tax laws. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.

q. Stock-Based Compensation

The Company applies the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for stock-based compensation; therefore, no compensation expense
has been recognized for its fixed stock option plans as options generally are granted at fair market value based upon the closing price on the date immediately preceding the grant date. The Company has adopted the disclosure requirements for SFAS
No. 123, Accounting for Stock-Based Compensation. On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation Transition and Disclosure, which amends SFAS No. 123. SFAS
No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation, which we have adopted commencing with the year ended December 31, 2002. Accordingly, if compensation expense for the Companys
stock options had been



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



recognized, based upon the fair value of awards granted, the Companys net income and earnings per share would have been reduced to the following pro
forma amounts (in thousands, except share data):



|                                                                                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                                                                |  | 2005 |            |   | 2004 |   |            | 2003 | 
|Net income, as reported                                                                                                                         |  | $    | 46,778     |   |      | $ | 27,573     |      |  | $ | 11,237     |  
|Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |      | (689       | ) |      |   | (873       | )    |  |   | (435       | )
|                                                                                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|Pro forma net income                                                                                                                            |  | $    | 46,089     |   |      | $ | 26,700     |      |  | $ | 10,802     |  
|                                                                                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|Net income per Share:                                                                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Basicas reported                                                                                                                               |  | $    | 1.90       |   |      | $ | 1.14       |      |  | $ | .52        |  
|Basicpro forma                                                                                                                                 |  | $    | 1.87       |   |      | $ | 1.10       |      |  | $ | .50        |  
|                                                                                                                                                |  |      |           
|Dilutedas reported                                                                                                                             |  | $    | 1.86       |   |      | $ | 1.12       |      |  | $ | .51        |  
|Dilutedpro forma                                                                                                                               |  | $    | 1.84       |   |      | $ | 1.09       |      |  | $ | .49        |  
|Weighted average shares outstanding:                                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                                                                                                                           |  |      | 24,634,558 |   |      |   | 24,170,212 |      |  |   | 21,441,645 |  
|Diluted                                                                                                                                         |  |      | 25,107,395 |   |      |   | 24,598,194 |      |  |   | 21,900,139 |  

The pro forma amounts were estimated using the Black-Scholes option-pricing model with the
following assumptions:



|                                               |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                               |  | 2005 |       |   | 2004 |   |       | 2003 | 
|Expected term (years)                          |  |      | 7.0   |   |      |   | 7.0   |      |  |   | 7.0   |  
|Volatility                                     |  |      | 56.75 | % |      |   | 57.17 | %    |  |   | 56.97 | %
|Annual dividend per share                      |  | $    | 0.00  |   |      | $ | 0.00  |      |  | $ | 0.00  |  
|Risk free interest rate                        |  |      | 3.98  | % |      |   | 3.91  | %    |  |   | 3.62  | %
|Weighted-average fair value of options granted |  | $    | 12.29 |   |      | $ | 33.29 |      |  | $ | 13.23 |  

The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Companys options have
characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.

During the year ended December 31, 2005, the Company issued 77,000 Restricted Stock Units (the Units) to certain directors, officers and employees with a grant date fair value of $22.68 per share for
62,000 and a grant date fair value of $21.46 for the remaining 15,000. Each Unit represents the right to receive one share of the Companys Common Stock when the Unit vests. For directors, the Units vest annually over three years on the
anniversary date of their issuance. For officers and employees, the Units vest annually over five years on the anniversary date of their issuance. Pursuant to APB 25, the Company records compensation expense for the amount of the grant date fair
value on a straight line basis over the vesting period. The Company incurred charges associated with the vesting of the Units of $222,000 for the year ended December 31, 2005.

r. Comprehensive Income

Comprehensive income encompasses all changes in equity other than those arising from transactions with stockholders, and consists of net income, currency translation adjustments, pension adjustments and unrealized net gains and losses on
investments classified as available-for-sale.

s. New Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods financial statements for changes in



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154
also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for
as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted
for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. We are required to adopt the provisions of SFAS No. 154, as applicable, beginning in fiscal 2006. We do not expect the
adoption of this standard to have a material impact on our consolidated financial position, results of operations or cash flow.

In
November 2004, SFAS No. 151, Inventory Costs-an amendment of ARB No. 43, Chapter 4, was issued. This Statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect adoption of this
standard to have a material impact on our consolidated financial position, results of operations or cash flow.

In December 2004, the FASB
issued FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004. FAS 109-2 provides guidance under FASB Statement
No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises income tax expense and
deferred tax liability. The Jobs Act was enacted on October 22, 2004. FAS 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for
reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. We do not anticipate the adoption will have a material impact on our consolidated financial statements. Accordingly, as provided for in
FAS 109-2, we have not adjusted our tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

In
December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets-an amendment of APB Opinion No. 29, which amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 defines a nonmonetary exchange as having commercial substance if the future cash flow of the entity are expected to
change significantly as a result of the exchange. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and shall be applied prospectively. We adopted SFAS No. 153 in the
third quarter ended December 31, 2005, and its adoption did not have a material effect on our financial position, results of operations or cash flow.

In December 2004, the FASB issued a revision of SFAS No. 123, Accounting for Stock Based Compensation, SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance and eliminates the alternative to use Opinion 25s intrinsic value method of accounting that was provided in SFAS No. 123 as
originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. SFAS No. 123(R) requires all entities recognize compensation expense in an amount equal to the fair value of
share-based payments (e.g. stock options and restricted stock) granted to employees. This applies to all transactions involving the issuance of our own equity in exchange for goods or services, including employee services. Upon adoption of SFAS
No. 123(R), all stock option awards to employees will be recognized as expense in the income statement, typically over any related vesting period. SFAS No. 123(R) carried forward the guidance from SFAS No. 123 for payment transactions
with non-employees. The Securities and Exchange Commission amended the compliance date on April 14, 2005, to require public companies to adopt the standard as of the beginning of the first annual period that begins after June 15, 2005. We
will, therefore, be required to adopt SFAS No. 123(R) in the first quarter of 2006.



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CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

1. Modified Prospective Method under which compensation cost is recognized beginning with the effective date (a) based on the
requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the
effective date.

2. Modified Retrospective Method which includes the requirements of the modified prospective method
described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of
adoption.

The Company anticipates adopting the Modified Prospective Method and expects that the adoption of SFAS 123(R) will have an
impact on the Companys operating expense of $0.6 million for the year ended December 31, 2006 based on the outstanding unvested stock options at December 31, 2005. The Company cannot estimate the impact of the Companys operating expense
of any additional stock options that may be granted.

3. Acquisitions

On August 23, 2004, the Company completed the acquisition of ESK Ceramics GmbH and Co. KG (ESK Ceramics) from Wacker-Chemie GmbH, pursuant to a Sale and Purchase Agreement dated June 30, 2004.

The purchase price was approximately $142.2 million, which included $4.7 million of transaction costs, of which $4.1 million were recorded
as of December 31, 2004. The purchase price was financed with $110.0 million of long-term debt borrowed under a new credit facility of $160.0 million provided by a syndicate of banks and institutional lenders led by Wachovia Bank, pursuant to a
Credit Agreement dated August 18, 2004. The balance of the purchase price and transaction costs was paid with a portion of the Companys existing cash. ESK Ceramics, based in Kempten, Germany, is a manufacturer of industrial technical
ceramic powders and advanced technical ceramic products.

In accordance with SFAS No. 141, Business Combinations, the
acquisition has been accounted for under the purchase method of accounting. The estimates of fair value of the assets acquired and liabilities assumed are based on our estimates. The following table summarizes the components of the purchase price
(in thousands):



|                                              |  |   |         |  
|--------------------------------------------- |  | - | ------- | -
|Cash and debt incurred                        |  | $ | 137,488 |  
|Transaction costs                             |  |   | 4,677   |  
|                                              |  |   |         |  
|Total purchase price                          |  | $ | 142,165 |  
|                                              |  |   |         |  
|                                              | 
|Fair value of assets and liabilities assumed: |  |   |         |  
|Cash                                          |  | $ | 610     |  
|Accounts receivable, net                      |  |   | 14,263  |  
|Inventory                                     |  |   | 24,916  |  
|Property, plant and equipment                 |  |   | 104,234 |  
|Other assets                                  |  |   | 9,295   |  
|Backlog                                       |  |   | 500     |  
|Developed technology                          |  |   | 4,600   |  
|Tradename                                     |  |   | 2,100   |  
|Goodwill                                      |  |   | 3,060   |  
|Assumed liabilities                           |  |   | (21,413 | )
|                                              |  |   |         |  
|Net assets acquired                           |  | $ | 142,165 |  
|                                              |  |   |         |  

The Goodwill acquired in these acquisitions is not deductible for income tax purposes.



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Unaudited pro-forma combined results of operations of the Company, assuming the acquisition had occurred as of January 1, 2003, and January 1,
2004, respectively, are presented below. The pro-forma combined results of operations for the year ended December 31, 2004 and 2003, include pro-forma results of operations for the acquisition described above and adjustments to intercompany
sales, depreciation, amortization, pension costs, and interest. The pro-forma combined results of operations for the year ended December 31, 2004 and 2003 contain the use of certain estimates and adjustments to reflect twelve months of results
of operations for the acquisition discussed above. These combined results have been prepared for comparison purposes only and do not purport to be indicative of what operating results would have been, and may not be indicative of future operating
results (in thousands except per share amounts):



|                    |  |                         |         |      |   |        
|------------------- |  | ----------------------- | ------- | ---- | - | -------
|                    |  | Year ended December 31,
|                    |  | 2004                    |         | 2003
|                    |  | (unaudited)            
|Net Sales           |  | $                       | 281,619 |      | $ | 193,337
|Net Income          |  |                         | 28,870  |      |   | 13,765 
|Earnings per share: |  |                         |         |      |   |        
|Basic               |  | $                       | 1.19    |      | $ | 0.64   
|Diluted             |  | $                       | 1.17    |      | $ | 0.63   

The pro forma adjustments are based upon available information and certain assumptions that the
Company believes are reasonable under the circumstances.

On May 15, 2004, the Company completed the purchase of the assets and
business of Quest Technology, LP, a privately held firm focusing exclusively on the injection molding of technical ceramics. The purchase price for the acquisition was approximately $2.7 million consisting of 107,095 newly issued shares of Ceradyne
common stock, cash payments totaling approximately $300,000 and the assumption of certain liabilities. The purchase price was allocated to net tangible assets and goodwill of $714,000 and $1.9 million, respectively.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, the new intangible asset balance
will be allocated between identifiable intangible assets and remaining goodwill. Goodwill will not be amortized but is subject to an ongoing assessment for impairment.

4. Debt and Bank Borrowing Arrangements; Convertible Note and Common Stock offerings

During December
2005, the Company completed a public offering of 2,070,000 shares of common stock at a price to the public of $43.31 per share. The Company received net proceeds of approximately $84.6 million from this offering after deducting offering expenses and
underwriting discounts of $5.0 million. Concurrent with the common stock offering, during December 2005, the Company issued $121.0 million of 2.875% senior subordinated convertible notes due December 15, 2035.

Interest on the notes is payable on December 15 and June 15 of each year, commencing on June 15, 2006. The notes are convertible into
17.1032 shares of Ceradynes common stock for each $1,000 principal amount of the notes (which represents a conversion price of approximately $58.47 per share), subject to adjustment. The notes are convertible only under certain circumstances,
including if the price of the Companys common stock reaches specified thresholds, if the notes are called for redemption, if specified corporate transactions or fundamental change occur, or during the 10 trading days prior to maturity of the
notes. The Company many redeem the notes at any time after December 20, 2010, for a price equal to 100% of the principal amount plus accrued and unpaid interest, including contingent interest (as described below), if any, up to but excluding
the redemption date.

With respect to each $1,000 principal amount of the notes surrendered for conversion, the Company will deliver the
conversion value to holders as follows: (1) an amount in cash equal to the lesser of (a) the aggregate conversion value of the notes to be converted and (b) $1,000, and (2) if the aggregate conversion value of the notes to be
converted is greater than the $1,000, an amount in shares or cash equal to such aggregate conversion value in excess of $1,000.



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The notes contain put options, which may require the Company to repurchase in cash all or a portion of the notes on December 15,
2012, December 15, 2015, December 15, 2020, December 15, 2025, and December 15, 2030 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest,
including contingent interest (as described below), if any, up to but excluding the repurchase date.

The Company is obligated to pay
contingent interest to the holders of the notes during any six-month period from June 15 to December 14 and from December 15 to June 14, commencing with the six-month period beginning December 20, 2010 and ending on
June 14, 2011, if the average trading price of the note for the five trading day period ending on the third trading day immediately preceding the first day of the relevant contingent interest period equals $1,200 (120% of the principal amount
of a note) or more. The amount of contingent interest payable per note for any relevant contingent interest period shall equal 0.25% per annum of the average trading price of a note for the five trading day period ending on the third trading
day immediately preceding the first day of the relevant contingent interest period.

On or prior to the maturity date of the notes, upon
the occurrence of a fundamental change, under certain circumstances, the Company will provide for a make whole amount by increasing, for the time period described herein, the conversion rate by a number of additional shares for any conversion of the
notes in connection with such fundamental change transactions. The amount of additional shares will be determined based on the price paid per share of Ceradynes common stock in the transaction constituting a fundamental change and the
effective date of such transaction. This make whole premium feature represents an embedded derivative. Since this feature has no measurable impact on the fair value of the notes and no separate trading market exists for this derivative, the value of
the embedded derivative was determined to be de minimis. Accordingly, no value has been assigned at issuance or at December 31, 2005.

The Company utilizes a convertible bond pricing model and a probability weighted valuation model, as applicable, to determine the fair values of the embedded derivatives noted above.

On December 19, 2005, the Company repaid the balance of its term loan of $108.9 million and $9.8 million of its line of credit, and approximately
$0.1 million of accrued interest, using the net proceeds from the notes and proceeds from its concurrent public offering of its common stock. The Company retired the credit facility. As a result of the termination of the term loan, the Company wrote
off the remaining unamortized debt issuance costs of approximately $2.6 million in the fourth quarter of 2005.

In December 2005, the
Company established a new unsecured $10.0 million line of credit. As of December 31, 2005, there were no outstanding amounts on the line of credit. However, the available line of credit at December 31, 2005 has been reduced by an
outstanding letter of credit in the amount of $2.3 million. The interest rate on the credit line is based on the LIBOR rate for a period of one month, plus a margin of one percent, which equaled 5.4% as of December 31, 2005.

Pursuant to the bank line of credit, the Company is subject to certain covenants, which include, among other things, the maintenance of specified minimum
amounts of tangible net worth and quick assets to current liabilities ratio. At December 31, 2005, the Company was in compliance with these covenants.

5. Financial Instruments

Foreign Exchange Risk Management

The Company enters into foreign exchange forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to
allow management to focus its attention on its core business operations. Accordingly, the Company enters into contracts which change in value as foreign exchange rates change to economically offset the effect of changes in value of foreign currency
assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. The Company enters into foreign exchange forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures,
generally for periods not to exceed one year. These derivative instruments are not designated as accounting hedges.

The Company measures
the financial statements of its foreign subsidiaries using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are
translated at the rates of exchange prevailing during the year. Translation adjustments resulting from this process are included in stockholders equity. Gains and losses from foreign currency transactions are included in other income,
miscellaneous.



F-15



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In June and July 2004, the Company entered into forward exchange contracts outstanding totaling approximately $126.0 million exchangeable into
110.0 million Euros. These contracts were opened in connection with the purchase of ESK Ceramics and in August 2004 were converted into Euros to serve as part of the purchase price. The fair market value of the contract at expiration in August
2004 was $1.9 million, which was recognized as a gain during the year ended December 31, 2004. This was recorded in the miscellaneous income line of the income statement. As of December 31, 2005, the Company did not have any outstanding
forward exchange contracts.

6. Income Taxes

The provision (benefit) for income taxes is comprised of the following for the year ended December 31 (in thousands):



|                           |  |      |        |   |      |   |        |      |  |   |      
|-------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | -----
|                           |  | 2005 |        |   | 2004 |   |        | 2003
|Current, domestic          |  | $    | 28,244 |   |      | $ | 16,282 |      |  | $ | 4,935
|Current, foreign           |  |      | 1,836  |   |      |   | 280    |      |  |   |     
|                           |  |      |        |   |      |   |        |      |  |   |      
|Current, total             |  |      | 30,080 |   |      |   | 16,562 |      |  |   | 4,935
|                           |  |      |        |   |      |   |        |      |  |   |      
|Deferred, domestic         |  |      | (4,761 | ) |      |   | 56     |      |  |   | 1,116
|Deferred, foreign          |  |      | 1,133  |   |      |   | (272   | )    |  |   |     
|                           |  |      |        |   |      |   |        |      |  |   |      
|Deferred, total            |  |      | (3,628 | ) |      |   | (216   | )    |  |   | 1,116
|                           |  |      |        |   |      |   |        |      |  |   |      
|Provision for income taxes |  | $    | 26,452 |   |      | $ | 16,346 |      |  | $ | 6,051
|                           |  |      |        |   |      |   |        |      |  |   |      

The components of the Companys deferred tax asset (liability) as of December 31, 2005
and 2004 are as follows (in thousands):



|                                |  |              |        |   |      |   |        |  
|------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                |  | December 31, |       
|                                |  | 2005         |        |   | 2004 |  
|Current Asset:                  |  |              |        |   |      |   |        |  
|Inventory adjustments           |  | $            | 2,932  |   |      | $ | 1,929  |  
|Vacation accrual                |  |              | 529    |   |      |   | 402    |  
|Bad debt allowance              |  |              | 118    |   |      |   | 200    |  
|Accrued payroll                 |  |              | 1,048  |   |      |   | 773    |  
|State taxes                     |  |              | 1,535  |   |      |   | 983    |  
|Other                           |  |              | 179    |   |      |   | (77    | )
|                                |  |              |        |   |      |   |        |  
|                                |  | $            | 6,341  |   |      | $ | 4,210  |  
|                                |  |              |        |   |      |   |        |  
|Noncurrent Liability:           |  |              |        |   |      |   |        |  
|Depreciation and amortization   |  | $            | (7,178 | ) |      | $ | (7,173 | )
|Deferred compensation           |  |              | 1,437  |   |      |   | 1,041  |  
|Unrealized currency gain (loss) |  |              | 314    |   |      |   |       |  
|State Taxes                     |  |              | 181    |   |      |   | 199    |  
|Other                           |  |              | 710    |   |      |   | 238    |  
|                                |  |              |        |   |      |   |        |  
|                                |  | $            | (4,536 | ) |      | $ | (5,695 | )
|                                |  |              |        |   |      |   |        |  



F-16



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The effective income tax rate for the years ended December 31, 2005, 2004 and 2003 differs from the Federal statutory income tax rate due to the
following items (in thousands):



|                                                           |  |              |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                           |  | December 31, |       
|                                                           |  | 2005         |        |   | 2004 |   |        | 2003 | 
|Income before taxes, domestic                              |  | $            | 64,430 |   |      | $ | 44,515 |      |  | $ | 17,288 |  
|Income before taxes, foreign                               |  |              | 8,890  |   |      |   | (596   | )    |  |   |       |  
|                                                           |  |              |        |   |      |   |        |      |  |   |        |  
|Income before taxes, total                                 |  | $            | 73,230 |   |      | $ | 43,919 |      |  | $ | 17,288 |  
|                                                           |  |              |        |   |      |   |        |      |  |   |        |  
|Provision for income taxes at federal statutory rate (35%) |  |              | 25,631 |   |      |   | 15,372 |      |  |   | 5,878  |  
|State income taxes, net of federal benefit                 |  |              | 3,453  |   |      |   | 2,210  |      |  |   | 698    |  
|Permanent Items                                            |  |              | 169    |   |      |   | 19     |      |  |   | 32     |  
|Extraterritorial income exclusion                          |  |              | (1,010 | ) |      |   | (429   | )    |  |   | (99    | )
|Credits                                                    |  |              | (389   | ) |      |   | (189   | )    |  |   | (456   | )
|Manufacturing deduction                                    |  |              | (310   | ) |      |   |       |      |  |   |       |  
|Other                                                      |  |              | (1,092 | ) |      |   | (637   | )    |  |   | (2     | )
|                                                           |  |              |        |   |      |   |        |      |  |   |        |  
|Provision for income taxes                                 |  | $            | 26,452 |   |      | $ | 16,346 |      |  | $ | 6,051  |  
|                                                           |  |              |        |   |      |   |        |      |  |   |        |  
|Effective tax rate                                         |  |              | 36.12  | % |      |   | 37.22  | %    |  |   | 35.00  | %
|                                                           |  |              |        |   |      |   |        |      |  |   |        |  

The exercise of stock options represents a tax benefit and has been reflected as a reduction of
taxes payable and an increase to the additional paid-in capital account. The benefit recorded was $1.6 million, $3.1 million and $2.7 million for the years ended December 31, 2005, 2004 and 2003, respectively.

7. Employee Retirement and Other Benefit Plans

Supplemental Retirement Plan

In December 1988, the Board of Directors of the Company approved the adoption of a
supplemental retirement plan, the Ceradyne SMART 401(k) Plan (the Plan), in which substantially all employees are eligible to participate after completing 90 days of employment. Participation in the Plan is voluntary. An employee may elect to
contribute up to fifteen percent (15% or the maximum deferred tax amount of $18,000 in 2005, whichever is less) of the employees pretax compensation as a basic contribution. The Company may contribute any amount which the Board of Directors
annually determines appropriate. Company contributions fully vest and are non-forfeitable after the participant has completed five years of service. The Companys related contributions for the years ended December 31, 2005, 2004 and 2003
were $880,000, $556,000 and $361,000, respectively.

The Companys contribution is in the form of shares of its common stock. The
number of shares to be contributed will be determined by dividing the total Company match for the Plan year by the higher of the market value per share of common stock as of the end of that Plan year (December 31), or the audited book value per
share of common stock as of the end of that Plan year. The participants cash contributions may be invested, at their discretion, in several funds.

Based on the market value per share of the Companys common stock on December 31, 2005, a total of 19,384 shares were contributed in 2006 as the Companys matching contribution under the Plan for 2005.
After that contribution, there were 549,840 shares remaining and available for future contribution under the Plan.

Pension and
Postretirement Benefit Plans

In connection with the acquisition of ESK Ceramics in August 2004, the Company sponsors a defined benefit
pension plan in Germany related to its ESK Ceramics employees.

These pension benefits are rendered for the time after the retirement of
the employees by payments into legally independent pension and relief facilities. They are generally based on length of service, wage level and position in the company. The direct and indirect obligations comprise obligations for pensions that are
already paid currently and expectations for pensions payable in the future.

Components of net periodic benefit cost under the pension plan
(subsequent to the acquisition) were (in thousands):



|                                         |  |      |        |   |      |   |      |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ---- | -
|                                         |  | 2005 |        |   | 2004 |  
|Service cost                             |  |      | 1,507  |   |      |   | 439  |  
|Interest cost                            |  |      | 1,636  |   |      |   | 490  |  
|Amortization of unrecognized (gain)/loss |  |      | 14     |   |      |   |     |  
|Expected return on plan assets           |  |      | (1,689 | ) |      |   | (512 | )
|                                         |  |      |        |   |      |   |      |  
|Net periodic benefit cost                |  | $    | 1,468  |   |      | $ | 417  |  
|                                         |  |      |        |   |      |   |      |  



F-17



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The weighted-average assumptions used to determine net periodic benefit costs were as follows:



|                               |  |      |   |  |      |  
|------------------------------ |  | ---- | - |  | ---- | -
|                               |  | 2005 |   |  | 2004 |  
|Discount rate:                 |  | 4.3  | % |  | 5.5  | %
|Expected return on plan assets |  | 2.5  | % |  | 6.0  | %
|Rate of compensation increase: |  | 6.0  | % |  | 3.0  | %

Components of the change in benefit obligation, change in plan assets and funded status for the
Companys pension plans for December 31, 2005 and December 31, 2004 were as follows (in thousands):



|                                                                                           |  |      |        |   |      |   |        |  
|------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                           |  | 2005 |        |   | 2004 |  
|Change in benefit obligation:                                                              |  |      |        |   |      |   |        |  
|Benefit obligation, beginning of period in 2005 and for 2004 at date of acquisition        |  | $    | 33,672 |   |      | $ | 26,457 |  
|Service cost                                                                               |  |      | 1,506  |   |      |   | 439    |  
|Interest cost                                                                              |  |      | 1,636  |   |      |   | 489    |  
|Actuarial (gain) loss                                                                      |  |      | 8,022  |   |      |   | 3,073  |  
|Benefits paid                                                                              |  |      | 333    |   |      |   | 424    |  
|Impact of foreign currency translation                                                     |  |      | (4,779 | ) |      |   | 2,790  |  
|                                                                                           |  |      |        |   |      |   |        |  
|Benefit obligation, end of period                                                          |  | $    | 40,390 |   |      | $ | 33,672 |  
|                                                                                           |  |      |        |   |      |   |        |  
|Change in plan assets:                                                                     |  |      |        |   |      |   |        |  
|Fair value of plan assets, beginning of period in 2005 and for 2004 at date of acquisition |  | $    | 27,944 |   |      | $ | 24,788 |  
|Actual return on plan assets                                                               |  |      | 8,302  |   |      |   | 392    |  
|Company contribution                                                                       |  |      | 558    |   |      |   | 192    |  
|Employees contribution                                                                     |  |      | 558    |   |      |   | 192    |  
|Benefits paid                                                                              |  |      | (151   | ) |      |   | (46    | )
|Impact of foreign currency translation                                                     |  |      | (3,962 | ) |      |   | 2,426  |  
|                                                                                           |  |      |        |   |      |   |        |  
|Fair value of plan assets, end of period                                                   |  | $    | 33,249 |   |      | $ | 27,944 |  
|                                                                                           |  |      |        |   |      |   |        |  
|Funded status of plans                                                                     |  |      | (7,141 | ) |      |   | (5,728 | )
|Unrecognized net actuarial gain (loss)                                                     |  |      | 4,335  |   |      |   | 3,440  |  
|                                                                                           |  |      |        |   |      |   |        |  
|Net liabilities recognized                                                                 |  | $    | 2,806  |   |      | $ | 2,288  |  
|                                                                                           |  |      |        |   |      |   |        |  
|Amounts recognized in the consolidated balance sheet consist of:                           |  |      |        |   |      |   |        |  
|Prepaid pension costs                                                                      |  |      | 2,813  |   |      |   | 3,573  |  
|Accrued pension liability                                                                  |  |      | (7,178 | ) |      |   | (6,408 | )
|Accumulated other comprehensive loss                                                       |  |      | 1,559  |   |      |   | 548    |  

At December 31, 2005 and 2004, the accumulated benefit obligation was $32.4 million and $24.3
million, respectively.

At December 31, 2005, the overall allocation of the plan assets was 39% in bonds, 29% in equities, 22% in real
estate, 5% in cash and 5% in private equity funds. The expected long-term rate of return on plan assets assumption is based on numerous factors including historical rates of return, long-term inflation assumptions, current and future financial
market conditions and expected asset allocation.

The Company expects to contribute $1.8 million to its defined benefit plans in 2006.



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following estimated future benefit payments are expected to be paid in the years indicated (in thousands):



|           |  |   |      
|---------- |  | - | -----
|2006       |  | $ | 234  
|2007       |  |   | 273  
|2008       |  |   | 303  
|2009       |  |   | 400  
|Thereafter |  |   | 5,305
|           |  |   |      
|           |  | $ | 6,515
|           |  |   |      

Additional Minimum Liability

The increase of the minimum pension liability in 2005 and 2004 resulted in an after tax reduction of stockholders equity of $1.6 million and $0.3
million is included in other comprehensive loss for the years ended December 31, 2005 and 2004, respectively.

8. Commitments and Contingencies

a. Operating Lease Obligations

The Company leases certain of its manufacturing facilities under noncancelable operating leases expiring at various dates through October 2015. The Company incurred rental expense under these leases of $2.0
million, $1.3 million and $1.0 million for the years ended 2005, 2004 and 2003, respectively. The approximate minimum rental commitments required under existing noncancelable leases as of December 31, 2005 are as follows (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2006       |  | $ | 2,073 
|2007       |  |   | 1,988 
|2008       |  |   | 1,899 
|2009       |  |   | 1,682 
|Thereafter |  |   | 2,650 
|           |  |   |       
|           |  | $ | 10,292
|           |  |   |       

b. Legal Proceedings

From time to time, the Company is involved in legal proceedings incidental to its business. The Company believes that pending actions, individually and in
the aggregate, will not have a material adverse effect on its financial condition, results of operations or cash flows, and that adequate provision has been made for the resolution of such actions and proceedings.

9. Disclosure About Segments of Enterprise and Related Information

The Company serves its markets and manages its business through four segments, each of which has its own distinct products, manufacturing facilities and administrative and selling functions. The Companys
Advanced Ceramic Operations, located in Costa Mesa, Irvine and San Diego, California, Lexington, Kentucky and Wixom, Michigan primarily produces armor, orthodontic products, components for diesel/automotive applications, and components for
semiconductor equipment, and houses the Companys SRBSN research and development activities. The Companys cathode development and production are handled through its Semicon Associates division located in Lexington, Kentucky. Fused silica
products, including missile radomes, are produced at the Companys Thermo Materials division located in Scottdale and Clarkston, Georgia. Ceramic powders including boron carbide, boron nitride, silicon nitride and silicon carbide are produced
at the Companys ESK Ceramics subsidiary located in Kempten, Germany and Bazet, France. ESK Ceramics also manufactures evaporation boats, high performance pump seals and functional and frictional coatings.



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



SEGMENT STATEMENT OF OPERATIONS FOR THE YEARS ENDED

DECEMBER 31, 2005, 2004
AND 2003

(amounts in thousands)



|                                                 |  |      |         |   |      |   |         |      |  |   |        
|------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------
|                                                 |  | 2005 |         |   | 2004 |   |         | 2003
|Revenue from External Customers                  |  |      |         |   |      |   |         |      |  |   |        
|ACO                                              |  | $    | 242,836 |   |      | $ | 159,791 |      |  | $ | 80,464 
|ESK Ceramics                                     |  |      | 105,800 |   |      |   | 36,019  |      |  |   |       
|Semicon Associates                               |  |      | 7,444   |   |      |   | 7,509   |      |  |   | 6,861  
|Thermo Materials                                 |  |      | 12,173  |   |      |   | 12,293  |      |  |   | 14,148 
|                                                 |  |      |         |   |      |   |         |      |  |   |        
|Total                                            |  | $    | 368,253 |   |      | $ | 215,612 |      |  | $ | 101,473
|                                                 |  |      |         |   |      |   |         |      |  |   |        
|                                                 |  |      |        
|Depreciation and Amortization                    |  |      |         |   |      |   |         |      |  |   |        
|ACO                                              |  | $    | 5,662   |   |      | $ | 3,508   |      |  | $ | 2,474  
|ESK Ceramics                                     |  |      | 8,191   |   |      |   | 3,033   |      |  |   |       
|Semicon Associates                               |  |      | 372     |   |      |   | 385     |      |  |   | 369    
|Thermo Materials                                 |  |      | 978     |   |      |   | 628     |      |  |   | 485    
|                                                 |  |      |         |   |      |   |         |      |  |   |        
|Total                                            |  | $    | 15,203  |   |      | $ | 7,554   |      |  | $ | 3,328  
|                                                 |  |      |         |   |      |   |         |      |  |   |        
|                                                 |  |      |        
|Segment Income before Provision for Income Taxes |  |      |         |   |      |   |         |      |  |   |        
|ACO                                              |  | $    | 63,655  |   |      | $ | 43,901  |      |  | $ | 16,201 
|ESK Ceramics                                     |  |      | 8,890   |   |      |   | (596    | )    |  |   |       
|Semicon Associates                               |  |      | 894     |   |      |   | 533     |      |  |   | 321    
|Thermo Materials                                 |  |      | (209    | ) |      |   | 81      |      |  |   | 766    
|                                                 |  |      |         |   |      |   |         |      |  |   |        
|Total                                            |  | $    | 73,230  |   |      | $ | 43,919  |      |  | $ | 17,288 
|                                                 |  |      |         |   |      |   |         |      |  |   |        
|                                                 |  |      |        
|Segment Assets                                   |  |      |         |   |      |   |         |      |  |   |        
|ACO                                              |  | $    | 253,426 |   |      | $ | 120,365 |      |  | $ | 89,828 
|ESK Ceramics                                     |  |      | 158,118 |   |      |   | 177,889 |      |  |   |       
|Semicon Associates                               |  |      | 6,111   |   |      |   | 5,874   |      |  |   | 5,685  
|Thermo Materials                                 |  |      | 12,538  |   |      |   | 12,226  |      |  |   | 8,694  
|                                                 |  |      |         |   |      |   |         |      |  |   |        
|Total                                            |  | $    | 430,193 |   |      | $ | 316,354 |      |  | $ | 104,207
|                                                 |  |      |         |   |      |   |         |      |  |   |        
|                                                 |  |      |        
|Expenditures for PP&E                            |  |      |         |   |      |   |         |      |  |   |        
|ACO                                              |  | $    | 12,382  |   |      | $ | 19,825  |      |  | $ | 11,237 
|ESK Ceramics                                     |  |      | 5,826   |   |      |   | 3,186   |      |  |   |       
|Semicon Associates                               |  |      | 223     |   |      |   | 587     |      |  |   | 224    
|Thermo Materials                                 |  |      | 1,792   |   |      |   | 2,965   |      |  |   | 832    
|                                                 |  |      |         |   |      |   |         |      |  |   |        
|Total                                            |  | $    | 20,223  |   |      | $ | 26,563  |      |  | $ | 12,293 
|                                                 |  |      |         |   |      |   |         |      |  |   |        



F-20



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



SEGMENT STATEMENT OF OPERATIONS FOR THE YEARS ENDED

DECEMBER 31, 2005, 2004
AND 2003



|                               |  |      |   |  |      |   |  |      |  
|------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                               |  | 2005 |   |  | 2004 |   |  | 2003 |  
|U.S. net sales (in %)          |  |      |   |  |      |   |  |      |  
|ACO                            |  | 63   | % |  | 69   | % |  | 76   | %
|ESK Ceramics                   |  | 7    | % |  | 4    | % |  | 0    | %
|Semicon Associates             |  | 2    | % |  | 2    | % |  | 6    | %
|Thermo Materials               |  | 2    | % |  | 4    | % |  | 13   | %
|                               |  |      |   |  |      |   |  |      |  
|Total U.S. net sales (in %)    |  | 74   | % |  | 79   | % |  | 95   | %
|                               |  |      |   |  |      |   |  |      |  
|                               |  |      |  
|Foreign net sales (in %)       |  |      |   |  |      |   |  |      |  
|ACO                            |  | 3    | % |  | 5    | % |  | 3    | %
|ESK Ceramics                   |  | 22   | % |  | 13   | % |  | 0    | %
|Semicon Associates             |  | 0    | % |  | 1    | % |  | 1    | %
|Thermo Materials               |  | 1    | % |  | 2    | % |  | 1    | %
|                               |  |      |   |  |      |   |  |      |  
|Total Foreign net sales (in %) |  | 26   | % |  | 21   | % |  | 5    | %
|                               |  |      |   |  |      |   |  |      |  
|                               |  |      |  
|Total net sales (in %)         |  |      |   |  |      |   |  |      |  
|ACO                            |  | 66   | % |  | 74   | % |  | 79   | %
|ESK Ceramics                   |  | 29   | % |  | 17   | % |  | 0    | %
|Semicon Associates             |  | 2    | % |  | 3    | % |  | 7    | %
|Thermo Materials               |  | 3    | % |  | 6    | % |  | 14   | %
|                               |  |      |   |  |      |   |  |      |  
|Total net sales (in %)         |  | 100  | % |  | 100  | % |  | 100  | %
|                               |  |      |   |  |      |   |  |      |  

(amounts in thousands)

The following is revenue by product line for Advanced Ceramic Operations for the years ended:



|              |  |              |         |      |   |         |  |   |       
|------------- |  | ------------ | ------- | ---- | - | ------- |  | - | ------
|              |  | December 31,
|              |  | 2005         |         | 2004 |   | 2003   
|Semiconductor |  | $            | 1,024   |      | $ | 1,418   |  | $ | 1,146 
|Armor         |  |              | 207,111 |      |   | 127,140 |  |   | 58,348
|Orthodontics  |  |              | 9,834   |      |   | 9,765   |  |   | 9,024 
|Automotive    |  |              | 16,019  |      |   | 11,685  |  |   | 4,998 
|Other         |  |              | 8,848   |      |   | 9,783   |  |   | 6,948 
|              |  |              |         |      |   |         |  |   |       
|              |  | $            | 242,836 |      | $ | 159,791 |  | $ | 80,464
|              |  |              |         |      |   |         |  |   |       

10. Stock Options

The Company has stock option plans; the 1994 Stock Incentive Plan and 2003 Stock Incentive Plan. The employee stock purchase plan, the 1995 Employee Stock Purchase Plan ended in December 2005.

The Company was authorized to grant options for up to 2,362,500 shares under its 1994 Stock Incentive Plan. The Company has granted options for 2,691,225
shares and has had cancellations of 394,886 shares through December 31, 2005. There are no remaining stock options available to grant under this plan. The options granted under this plan were granted at an exercise price at or above the fair
market value of the Companys common stock at the date of grant, and generally became exercisable over a five-year period for incentive stock options and six months for nonqualified stock options.

The Company may grant options and restricted stock units for up to 1,125,000 shares under the 2003 Stock Incentive Plan. The Company has granted options
for 475,125 shares under this plan through December 31, 2005. There have been cancellations of 12,000 shares associated with this plan through December 31, 2005. Options are granted at or above the fair market value at the date of grant
and generally become



F-21



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



exercisable over a five-year period for incentive stock options and six months for nonqualified options. The plan was amended in 2005 to allow the issuance
of Restricted Stock Units. During the year ended December 31, 2005, the Company issued 77,000 Restricted Stock Units (the Units) to certain directors, officers and employees with a grant date fair value of $22.68 per share for 62,000 and
a grant date fair value of $21.46 for the remaining 15,000.

The following is a summary of stock option activity:



|                               |  |                  |   |  |                              |       |   |                  |           |   |                              |   |       |                  |  |           |                              |  |   |       |  
|------------------------------ |  | ---------------- | - |  | ---------------------------- | ----- | - | ---------------- | --------- | - | ---------------------------- | - | ----- | ---------------- |  | --------- | ---------------------------- |  | - | ----- | -
|                               |  | 2005             |   |  | 2004                         |       |   | 2003             |          
|                               |  | Number ofOptions |   |  | WeightedAverageExercisePrice |       |   | Number ofOptions |           |   | WeightedAverageExercisePrice |   |       | Number ofOptions |  |           | WeightedAverageExercisePrice | 
|Outstanding, beginning of year |  | 1,145,703        |   |  | $                            | 7.79  |   |                  | 1,317,600 |   |                              | $ | 3.91  |                  |  | 1,788,435 |                              |  | $ | 2.35  |  
|Options granted                |  | 37,500           |   |  | $                            | 20.21 |   |                  | 221,625   |   |                              | $ | 22.19 |                  |  | 249,750   |                              |  | $ | 9.70  |  
|Options exercised              |  | (175,708         | ) |  | $                            | (5.45 | ) |                  | (364,122  | ) |                              | $ | (2.65 | )                |  | (707,310  | )                            |  | $ | (2.04 | )
|Options cancelled              |  | (29,625          | ) |  | $                            | (6.43 | ) |                  | (29,400   | ) |                              | $ | (6.17 | )                |  | (13,275   | )                            |  | $ | (2.53 | )
|                               |  |                  |   |  |                              |       |   |                  |           |   |                              |   |       |                  |  |           |                              |  |   |       |  
|Outstanding, end of year       |  | 977,870          |   |  | $                            | 8.73  |   |                  | 1,145,703 |   |                              | $ | 7.79  |                  |  | 1,317,600 |                              |  | $ | 3.91  |  
|                               |  |                  |   |  |                              |       |   |                  |           |   |                              |   |       |                  |  |           |                              |  |   |       |  
|Exercisable, end of year       |  | 623,870          |   |  | $                            | 6.93  |   |                  | 543,978   |   |                              | $ | 4.08  |                  |  | 648,900   |                              |  | $ | 2.29  |  

The following table summarizes information regarding options outstanding and
options exercisable at December 31, 2005:



|                         |  |                  |  |                                         |  |                              |       |                  |         |                              |   |      
|------------------------ |  | ---------------- |  | --------------------------------------- |  | ---------------------------- | ----- | ---------------- | ------- | ---------------------------- | - | -----
|                         |  | Outstanding      |  | Exercisable                            
|Range of Exercise Prices |  | Number ofOptions |  | AverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | Number ofOptions |         | WeightedAverageExercisePrice
|$1.44 - $2.81            |  | 225,025          |  | 4.33                                    |  | $                            | 2.10  |                  | 160,675 |                              | $ | 2.07 
|$2.98 - $3.58            |  | 339,770          |  | 6.01                                    |  | $                            | 3.13  |                  | 260,570 |                              | $ | 3.11 
|$10.53                   |  | 179,150          |  | 7.69                                    |  | $                            | 10.53 |                  | 110,750 |                              | $ | 10.53
|$21.84 - $24.07          |  | 233,925          |  | 8.61                                    |  | $                            | 16.43 |                  | 91,875  |                              | $ | 21.94



F-22



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##### Table of Contents

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



11. Quarterly Financial Information (unaudited)

The results by quarter for 2005 and 2004:



|                         |  |               |        |              |   |                      |  |                  |        |  |   |        
|------------------------ |  | ------------- | ------ | ------------ | - | -------------------- |  | ---------------- | ------ |  | - | -------
|Quarter Ending           |  |               |        |              |   |                      |  |                  |        |  |   |        
|                         |  | March 31,2004 |        | June 30,2004 |   | September 30,2004(1) |  | December 31,2004
|Net sales                |  | $             | 36,687 |              | $ | 39,225               |  | $                | 56,329 |  | $ | 83,371 
|Gross profit             |  |               | 11,653 |              |   | 13,394               |  |                  | 17,956 |  |   | 26,091 
|Net income               |  |               | 5,012  |              |   | 6,482                |  |                  | 7,294  |  |   | 8,785  
|Basic income per share   |  | $             | 0.21   |              | $ | 0.27                 |  | $                | 0.30   |  | $ | 0.36   
|Diluted income per share |  | $             | 0.21   |              | $ | 0.26                 |  | $                | 0.30   |  | $ | 0.35   
|                         |  |               |        |             
|Quarter Ending           |  |               |        |              |   |                      |  |                  |        |  |   |        
|                         |  | March 31,2005 |        | June 30,2005 |   | September 30,2005    |  | December 31,2005
|Net sales                |  | $             | 69,791 |              | $ | 89,903               |  | $                | 94,406 |  | $ | 114,153
|Gross profit             |  |               | 21,897 |              |   | 32,550               |  |                  | 34,830 |  |   | 41,863 
|Net income               |  |               | 5,985  |              |   | 11,400               |  |                  | 13,339 |  |   | 16,054 
|Basic income per share   |  | $             | 0.24   |              | $ | 0.47                 |  | $                | 0.54   |  | $ | 0.64   
|Diluted income per share |  | $             | 0.24   |              | $ | 0.46                 |  | $                | 0.53   |  | $ | 0.63   

---

|(1) | Includes the acquisition of ESKCeramics on August 23, 2004.
|--- | -----------------------------------------------------------



F-23



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|               |  |                |  |                        
|-------------- |  | -------------- |  | -----------------------
|March 17, 2006 |  | CERADYNE, INC.
|               |  |               
|               |  | By:            |  | /s/ JOEL P. MOSKOWITZ  
|               |  |                |  | Joel P. Moskowitz      
|               |  |                |  | Chief Executive Officer



| |  |     |  |                                                                    
| |  | --- |  | -------------------------------------------------------------------
| |  |    
| |  | By: |  | /s/ JERROLD J. PELLIZZON                                           
| |  |     |  | Jerrold J. Pellizzon                                               
| |  |     |  | Chief Financial Officer(Principal Financial and Accounting Officer)



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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                         
|2.1         |  | Sale and Purchase Agreement dated June 30, 2004, between registrant and Wacker-Chemie GmbH. Incorporated herein by reference to Exhibit 2.1 of Registrants Form 8-K Current Report dated
August 23, 2004, filed with the Commission on August 26, 2004.                                                            
|            | 
|3.1         |  | Restated Certificate of Incorporation of Ceradyne, Inc., as filed with the Secretary of State of Delaware on May 25, 1987. Incorporated herein by reference to Exhibit 3.1 to the
Registrants Form 10-Q Report for the quarter ended June 30, 2004.                                                                
|            | 
|3.2         |  | Certificate of Amendment of Restated Certificate of Incorporation of Ceradyne, Inc., as filed with the Secretary of State of Delaware on May 27, 2004. Incorporated herein by reference to
Exhibit 3.2 to the Registrants Form 10-Q Report for the quarter ended June 30, 2004.                                    
|            | 
|3.3         |  | Bylaws of Registrant. Incorporated herein by reference to Exhibit 3.2 to the Registrants Form 10-Q Report for the period ended June 30, 1996.                                                                                                                                                                      
|            | 
|3.4         |  | Amendment to Bylaws of Registrant, adopted April 29, 1996. Incorporated herein by reference to Exhibit 3.3 to the Registrants Form 10-Q Report for the period ended June 30,
1996.                                                                                                                                 
|            | 
|4.1         |  | Indenture dated December 19, 2005, between Ceradyne, Inc. and Union Bank of California, N.A., as Trustee. Incorporated herein by reference to Exhibit 4.1 of Registrants Form 8-K Current
Report dated December 13, 2005, filed with the Commission on December 19, 2005.                                          
|            | 
|4.2         |  | First Supplemental Indenture dated December 19, 2005, between Ceradyne, Inc. and Union Bank of California, N.A., as Trustee. Incorporated herein by reference to Exhibit 4.2 of
Registrants Form 8-K Current Report dated December 13, 2005, filed with the Commission on December 19, 2005.                       
|            | 
|4.3         |  | Form of 2.875% Senior Subordinated Convertible Note due 2035. Incorporated herein by reference to Exhibit 4.3 of Registrants Form 8-K Current Report dated December 13, 2005, filed with
the Commission on December 19, 2005.                                                                                      
|            | 
|10.1        |  | Lease between Trico Rents and the Registrant dated March 23, 1984, covering premises located at 235 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.14
to the Registrants Registration Statement on Form S-1 (File No. 2-90821).                                          
|            | 
|10.2        |  | Lease covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California dated October 28, 1985. Incorporated herein by reference to Exhibit 10.30 to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 1985.                                                             
|            | 
|10.3        |  | Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.45 to the Registrants Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.                                                                 
|            | 
|10.4        |  | Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.46 to the Registrants Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.                                                                 
|            | 
|10.5        |  | Short-form Memorandum of Lease Assignment dated December 15, 1986, and Lease dated June 23, 1980, covering premises located at 3449 Church Street, Scottdale, Georgia. Incorporated herein by
reference to Exhibit 10.47 to the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1986.
|            | 
|10.6        |  | Joint Development Agreement dated March 28, 1986 between Unitek Corporation and the Registrant, and First and Second Amendments thereto. Incorporated herein by reference to Exhibit 10.52 to
the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1986.                              
|            | 
|10.7*       |  | Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.31 to the Registrants Annual Report on Form 10-K for the fiscal year ended December 31,
1994.                                                                                                                             
|            | 
|10.8*       |  | Amendment No. 1 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 4.2 to Registrants Registration Statement on Form S-8 (File No.
33-61675).                                                                                                                            
|            | 
|10.9*       |  | Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated herein by reference to Exhibit 4.1 to Registrants Registration Statement on Form S-8 (File No. 33-61677).                                                                                                                                           



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.10       |  | Amendment No. 2, dated June 5, 1995, to Lease between Trico Rents and the Registrant covering premises located at 235 Paularino Avenue, Costa Mesa, California. Incorporated herein by
reference to Exhibit 10.32 to the Registrants Registration Statement on Form S-1 (File No. 33-62345).                                                                                                                                      
|            | 
|10.11       |  | Amendment No. 2, dated June 5, 1995, to Lease covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.33 to the
Registrants Registration Statement on Form S-1 (File No. 33-62345).                                                                                                                                                                           
|            | 
|10.12       |  | Amendment No. 2, dated June 5, 1995, to Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.34
to the Registrants Registration Statement on Form S-1 (File No. 33-62345).                                                                                                                                                        
|            | 
|10.13       |  | Amendment No. 2, dated June 5, 1995, to Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.35
to the Registrants Registration Statement on Form S-1 (File No. 33-62345).                                                                                                                                                        
|            | 
|10.14*      |  | Amendment No. 2 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.36 to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.                                                                                                                                                                                                                     
|            | 
|10.15*      |  | Amendment No. 3 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 4.4 to Registrants Registration Statement on Form S-8 (File No.
333-31679).                                                                                                                                                                                                                                          
|            | 
|10.16*      |  | Amendment No. 4 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.29 to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.                                                                                                                                                                                                                     
|            | 
|10.17*      |  | Amendment No. 5 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.29 to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.                                                                                                                                                                                                                     
|            | 
|10.18*      |  | Amendment No. 6 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporate herein by reference to Exhibit 4.7 to the Registrants Registration Statement on Form S-8 (File No.
333-64094).                                                                                                                                                                                                                                       
|            | 
|10.19*      |  | Amendment No. 1 to the Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated herein by reference to Exhibit 4.2 to the Registrants Registration Statement on Form S-8 (File No.
333-64078).                                                                                                                                                                                                                              
|            | 
|10.20       |  | Agreement to Extend Lease and Increase Rental Between Ida S. Borochoff and Lance Borochoff as Co-Trustees of the Charles Z. Borochoff Marital Trust created under the Will of Charles Z.
Borochoff, as Landland and CERADYNE, INC., as Successor to Thermo Materials Corporation, as Tenant. Incorporated herein by reference to Exhibit 10.33 to the Registrants Annual Report on Form 10-K for the year ended December 31,
2002.
|            | 
|10.21*      |  | Amendment No. 7 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by referenced to Exhibit 10.34 to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2002.                                                                                                                                                                                                                           
|            | 
|10.22*      |  | Ceradyne, Inc. 2003 Stock Incentive Plan, as Amended and Restated as of April 11, 2005. Incorporated herein by reference to Exhibit 10.1 to the Registrants Form 8-K Current Report dated
May 23, 2005, filed with the Commission on May 26, 2005.                                                                                                                                                                                
|            | 
|10.23*      |  | Form of Stock Option Agreement for use under the 2003 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.2 to the Registrants Form 8-K Current Report dated May 23,
2005, filed with the Commission on May 26, 2005.                                                                                                                                                                                            
|            | 
|10.24*      |  | Form of Restricted Stock Unit Award Agreement for use under the 2003 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.3 to the Registrants Form 8-K Current Report
dated May 23, 2005, filed with the Commission on May 26, 2005.                                                                                                                                                                             
|            | 
|10.25       |  | Lease agreement between California State Teachers Retirement System, as Landlord and CERADYNE, INC., as tenant. Incorporated herein by reference to Exhibit 10.23 to the
Registrants Annual Report on Form 10-K for the year ended December 31, 2003.                                                                                                                                                                            



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.26       |  | Credit Agreement dated August 18, 2004, between registrant, Wachovia Bank and the other lenders named therein. Incorporated herein by reference to Exhibit 10.1 of Registrants Form 8-K
Current Report dated August 23, 2004, filed with the Commission on August 26, 2004.                                                                                                                                                                                                                                                                         
|            | 
|10.27       |  | Amendment No. 1 dated December 22, 2004, to the Credit Agreement dated August 18, 2004, between registrant, Wachovia Bank and the other lenders named therein. Incorporated herein by reference
to Exhibit 10.25 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2004.                                                                                                                                                                                                                                                
|            | 
|10.28       |  | Amendment No. 2 to Credit Agreement, dated December 13, 2005, between Ceradyne, Inc., Ceradyne ESK, LLC and ESK Ceramics GmbH & Co. KG (collectively, the Borrowers), and the
banks, financial institutions and other lenders party thereto (collectively, the Lenders), and Wachovia Bank, National Association, as collateral agent and administrative agent for the Lenders. Incorporated herein by reference to Exhibit
10.1 of Registrants Form 8-K Current Report dated December 13, 2005, filed with the Commission on December 19, 2005.
|            | 
|10.29*      |  | Cash Fees Payable to Non-Employee Directors for Service on the Board and its Committees. Incorporated herein by reference to Exhibit 10.3 of Registrants Form 8-K Current Report dated
February 28, 2005, filed with the Commission on March 4, 2005.                                                                                                                                                                                                                                                                                               
|            | 
|10.30*      |  | Base Salaries Payable to Executive Officers during 2006. Incorporated herein by reference to Exhibit 10.1 of Registrants Form 8-K Current Report dated March 6, 2006, filed with the
Commission on March 9, 2006.                                                                                                                                                                                                                                                                                                                                   
|            | 
|10.31*      |  | Cash Bonus Plan for Executive Officers for 2006. Incorporated herein by reference to Exhibit 10.2 of Registrants Form 8-K Current Report dated March 6, 2006, filed with the Commission
on March 9, 2006.                                                                                                                                                                                                                                                                                                                                           
|            | 
|10.32       |  | Lease dated March 11, 1997 covering premises located at 3159-A Red Hill Avenue , Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|10.33       |  | Extension No. 2, dated February 2, 2005, to Lease dated March 11, 1997 covering premises located at 3159-A Red Hill Avenue , Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 
|10.34       |  | Lease dated January 24, 2001 covering premises located at 3161 Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | 
|10.35       |  | Extension No. 1, dated February 2, 2005, to Lease dated January 24, 2001 covering premises located at 3161 Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 
|10.36       |  | Extension No. 4, dated February 2, 2005, to Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|10.37       |  | Extension No. 4, dated February 2, 2005, to Lease dated October 28, 1985 covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                
|            | 
|10.38       |  | Lease dated October 28, 1985 covering premises located at 3169-B Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | 
|10.39       |  | Extension No. 4, dated February 2, 2005, to Lease dated October 28, 1985 covering premises located at 3169-B Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                
|            | 
|10.40       |  | Extension No. 4, dated February 4, 2005, to Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|10.41       |  | Lease dated February 4, 2005, covering premises located at 201 Paularino Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|10.42       |  | Lease dated February 4, 2005, covering premises located at 3159-B Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 
|10.43       |  | Extension No. 1, dated February 7, 2005, to Lease dated March 23, 2004 covering premises located at 235 Paularino Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|10.44       |  | Lease dated August 6, 2001covering premises located at 3165-A Red Hill Avenue, Costa Mesa, California.                                                                                                                                                                                                                                                                                                                                                                                                                                               



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##### Table of Contents

|            |  |                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                               
|10.45       |  | Extension No. 1, dated March 9, 2005, to Lease dated August 6, 2001covering premises located at 3165-A Red Hill Avenue, Costa Mesa, California.                           
|            | 
|10.46       |  | Lease dated January 5, 2005 covering premises located at 205 Paularino Avenue, Costa Mesa, California.                                                                    
|            | 
|10.47       |  | Extension No. 1, dated July 14, 2005, to Lease dated January 5, 2005, covering premises located at 205 Paularino Avenue, Costa Mesa, California.                          
|            | 
|12.1        |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                        
|            | 
|14.1        |  | Code of Business Conduct and Ethics. Incorporated herein by reference to Exhibit 14.1 to the Registrants Annual Report on Form 10-K for the year ended December 31,
2004.
|            | 
|21.1        |  | Subsidiaries of the Registrant. Incorporated herein by reference to Exhibit 21.1 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2004.     
|            | 
|23.1        |  | Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.                                                                                     
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       

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|* | Each of these exhibits constitutes a management contract, compensatory plan, or arrangement.
|- | --------------------------------------------------------------------------------------------